The firm announced that all Xbox 360 consoles suffer from a design flaw which could cause the machine to fail.
The firm will extend the warranty coverage from one to three years to compensate consumers, but does not plan to instate a recall or exchange programme.
Microsoft gaming chief Robbie Bach claimed in a conference call with financial analysts that the design issues surfaced recently.
"In the past couple of months we started to see significant increases in repair requests and call requests and significant attention from people," he said.
Microsoft did not disclose the exact nature of the problems, but said that it had made the necessary design changes and that units currently in stock will be upgraded.