The deal builds on an existing relationship between the companies and gives the software giant "direct, collaborative access" to TSMC's semiconductor processes, while TSMC will provide semiconductor manufacturing services, the chipmaker said.
TSMC is the world's leading contract manufacturer of computer chips.
Microsoft already has signed up its two main semiconductor partners for the next version of the Xbox, expected to hit the market late next year. IBM signed an agreement in November to design the main processor for the new console. Graphics chip underdog ATI Technologies earlier signed on to create the graphics processor for the next Xbox. The current version of the console uses a graphics processor from market leader Nvidia and an Intel processor based on the Pentium III PC chip.
Both the ATI and IBM contracts cover only design of the processors, not manufacturing. It was unclear whether the TSMC contract would cover manufacture of either or both of those chips or would focus on other components. IBM runs its own chip fabrication plants, but ATI is a "fabless" semiconductor company that typically contracts with TSMC for manufacturing.
Microsoft has been taking an active role in the design of the chips for the next Xbox, as it shifts from using relatively standard parts to more customized silicon.
A Microsoft representative did not immediately respond to a request for comment.
"Microsoft's future Xbox products and services will require leading-edge semiconductor technologies," said Rick Tsai, president of TSMC, in a statement. "This agreement underscores the importance of a partnership between the two companies to identify the best technology platforms for Microsoft's future products."
Looking for an edge in the highly competitive market for game machines, Microsoft last week dropped the price of the Xbox to about $150 in the United States.CNET News.com's David Becker contributed to this report.