The move will allow any developer, amateur or professional, to distribute an Xbox 360 game without having to print or distribute discs for the console.
Microsoft hopes that the initiative will bring more than 1,000 new games to Xbox Live by the end of the year.
"The time has come for the games industry to open its doors to all game creators, enabling anyone to share their creations with the world," said John Schappert, corporate vice president of Live software and services at Microsoft.
"Our goal is to drive a creative and social revolution in games with the same transformative power that we have seen in digital music and video sharing."
Developers will be able to create games via Microsoft's XNA Game Studio development tool.
The developer will be required to buy a subscription to the XNA Creators Club at $49 for four months or $99 for one year in order to upload the games.
Games are then reviewed by other users, who can approve the game for distribution on Xbox Live Marketplace.
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