According to Winrumors, the feature will come as part of a system software update, and will make use of the Kinect camera accessory to map user body movements to their Xbox Live avatar. It's also said to bring the mapping feature to games, and other avatar-enabled areas of the Xbox dashboard and its applications.
Avatars, which came long before Kinect, offer users a way to create a virtual character that's attached to their gamertag and user account. Microsoft also offers a built-in digital storefront to sell digital clothing and toys through piecemeal microtransactions.
As part of last November's Xbox 360 dashboard update, Microsoft gave its avatar program a visual refresh, to more correctly proportion them for skeletal tracking with Kinect. This new program then could very well be the next step toward making that functionality more apparent to end users.