Citing sources "familiar" with Microsoft's plans, The Verge says that the box will provide a "low-cost alternative" to the Xbox, offering consumers a choice between a TV set top box and a full-blown games console.
It would also compete with Apple TV and other devices that offer streaming of entertainment content.
© Microsoft
Microsoft is thought to be preparing a two-pronged strategy to conquer the living room with its new generation of Xbox hardware in 2013, including a rumoured brand new Xbox console and the Xbox TV box.
With a release date expected before the Christmas shopping season, the new Xbox set top box would run the "core components" of Windows 8 and offer a range of casual games rather than full console titles, The Verge reports.
Technical specifications remain unclear, but The Verge says that Microsoft will use a chipset enabling the box to boot up quickly and provide "near-instant access to TV and entertainment services".
Microsoft is also said to be working on bringing the Xbox Live service to third-party television sets as part of a licensing programme.
In a statement, Microsoft declined to confirm its plans, but did say: "Xbox 360 has found new ways to extend the console lifecycle by introducing controller-free experiences with Kinect and re-inventing the console with a new dashboard and new entertainment content partnerships.
"We are always thinking about what is next for our platform and how to continue to defy the lifecycle convention."
