LOS ANGELES (Reuters) - Microsoft Corp. said on Monday its new Xbox 360 will run video games developed for the earlier generation of its gaming machine, an enticement to get fans who have already spent hundreds of dollars on older Xbox games to purchase new hardware.

The world's largest software maker also announced a deal to feature Japanese publisher Square Enix Co. Ltd.'s "Final Fantasy" games, which up to now have been a cornerstone of rival Sony Corp.'s PS2 franchise.

Microsoft, which unveiled the Xbox 360 last week, will have between 25 and 40 game titles for the machine by the end of this year, with more than 160 games under development.

"That's obviously a huge milestone," said Robbie Bach, Microsoft's senior vice president in charge of the home and entertainment division. Typically new game consoles debut with fewer than 10 launch titles.

Xbox 360 will hit stores ahead of the U.S. holiday season, which begins in late November, with launches in Japan and Europe following within six weeks.

Microsoft's new white-and-silver concave console will feature three PowerPC-based microprocessors joined onto one chip to deliver powerful computing and advanced graphics, as well as a detachable 20-gigabyte hard drive and a wireless controller.

The deal with Square Enix, developer of the popular "Final Fantasy" series, is a big win for Microsoft, which struggled to get Japan's leading game developers to make games for the first Xbox console.

Square Enix President Yoichi Wada said that the company will publish "Final Fantasy XI" for Xbox 360 and also develop other games for Microsoft's newest game machine.

Sony said on Monday that its next video game console, the PlayStation 3, will launch in 2006, with a custom-designed "Cell" chip with twice the processing speed of the Xbox 360. The third-generation PlayStation will also be capable of playing games developed for the PlayStation 2.

"PS3 truly is the system to be placed in the center of living rooms in homes around the world," Ken Kutaragi, the head of Sony's game unit, told a news conference.

Microsoft, which has made online gaming a key part of its Xbox strategy, also said that the Xbox Live service will reach 2 million connected users by June.

"Our goal is to be number one in the (gaming) marketplace," Bach told Reuters.

Although the Xbox 360 will be backward-compatible, Bach said that it won't necessarily run all of the older Xbox titles but instead, run the "top-selling" games.