The former Sony and Atari boss will become corporate vice president of its European division.
Harrison will be responsible for all UK studios including Rare, Lionhead and Soho Productions, as well as helping to influence the broader performance of Microsoft's European strategy.
"I am excited to be joining the senior team at Microsoft at a pivotal time for our industry," said Harrison.
"I am really impressed with the company's long-term vision for growing the market for interactive entertainment globally and also with the incredible wealth of talent, technology and resources the company has available to succeed."
Corporate vice president Phil Spencer added: "We are honoured to have Phil join a team that boasts a wealth of talent from across the industry.
"Phil is one of video gaming's true visionaries, and his experience overseeing global studios and deep industry relationships make him the ideal person to lead our European efforts. Under his leadership, we look forward to continuing cultivating the best talent and growing our business in the region."
The position is unrelated to Peter Molyneux's departure from Microsoft last week, with Lionhead COO Mark Webley filling his role as head of Lionhead Studios.
Harrison has over 25 years' experience in the industry, and spent the last two years as a partner with London Venture Partners, a company he co-founded which specialises in games investment, where he will continue to be involved with as a special advisor.
Xbox 360 will receive a number of high-profile releases this year, including Halo 4 and Forza Horizon, as well as multiple new Xbox Live Arcade releases.
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