The co-operative first-person shooter will use Unreal Engine 3 in ways other downloadable titles have not.
"With a unique placement on the market, from over 900 games present on XBLA and PSN alone, Alien Fear is the only title to be developed as a full triple-A for Arcade," said executive producer Andrei Dan Vasile at a press briefing attended by Digital Spy.
"Based on Unreal 3 technology, we bring destructive environments, dynamic lighting, realistic impacts and so forth, which has never been done before for Arcade alone."
Playable with up to two people through local co-operative play, Alien Fear is an arcade-styled shooter with a scoring system and environment-driven kills, such as explosive barrels and shooting bridges.
The three-hour campaign is designed to be replayed for higher scores, and offers "impactful choices" that change the direction and story of the game.
Alien Fear will be available this spring on Xbox Live Arcade, PSN and PC.
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Watch a teaser trailer for City Interactive's Sniper Ghost Warrior 2 below: