AFP Photo/Timothy A. Clary
File picture shows a display of Microsoft's Xbox One in Union Square in New York
This cheaper console won't include the Kinect motion sensor, and now puts the Xbox One at the same price level as the PS4.
Microsoft will also continue to sell the more expensive $499 model, which includes the Kinect.
The decision to offer a lower-priced Xbox comes after the PS4 outsold Microsoft's console for three consecutive months in early 2014, NPD Group video game industry analyst Liam Callahan told CNET in March.
In March, Microsoft announced that it had sold 5 million Xbox One units to retailers, while Sony said it had sold 7 million PS4 consoles to customers by mid-April.
When Microsoft unveiled the Xbox One last year, it flaunted the console as a central hub for entertainment in your living room. A large part of this was the remote-free aspect of being able to browse between apps and select content just by using your voice.
With its newer Kinect-free option, Microsoft appears to be offering a more affordable choice for those who aren't into the multiplayer party games and touchless controls the Kinect has to offer.
Sony also makes a motion sensor for the PS4 that's similar to the Kinect. You can buy it separately for about $60.
At the same time, Microsoft also announced that Xbox One and Xbox 360 owners will no longer require a Live Gold subscription to access Netflix, Hulu, HBO Go, and YouTube.