Under the agreement, Netflix's Watch Instantly streaming-movie service will be playable on televisions connected to the console without any additional software or hardware.

Created as a PC service, Netflix has been partnering with consumer electronics companies to make Watch Instantly a TV experience. Netflix previously struck deals with LG Electronics and Roku.

A relationship with Xbox has been expected since Netflix CEO Reed Hastings joined Microsoft's board of directors last year. The service will be available at no additional cost to Xbox Live Gold members who also are Netflix subscribers.

The deal could boost Microsoft's efforts to turn the Xbox 360 into a digital entertainment hub, and it potentially gives Netflix access to more than 12 million Xbox Live subscribers.

Netflix has 8.2 million subscribers to its DVD-by-mail service, which boasts 100,000 titles, though only 10,000 of them are available to Watch Instantly users.

Also at E3 on Monday, Microsoft announced a deal with NBC Universal to add its high-definition TV shows and movies to Xbox Live. Among the films and series set to become available this week are the trio of "Bourne Identity" films and the TV shows "Heroes" and "The Office."

Microsoft also used their E3 press conference to showcase plenty of upcoming titles, including "Gears of War 2," "Fable 2" and "Fallout 3" that are squarely aimed at the hardcore player.

But the Redmond, Wash.-based company also seems to be going after the casual audience as well, unveiling a new software interface that will feature customizable avatars similar to the ones found in Club Penguin, Habbo and other popular virtual worlds.

By using the avatars in a new platform called Live Party, users will be able to watch their Netflix movies with as many as seven of their friends. The avatars also play a major roll in the rollout of several game shows debuting on Xbox Live this fall through a partnership with Endemol. Among the first shows will be an online version of "1 vs. 100" featuring virtual characters but real prizes.

That Netflix deal only impacts Xbox Live in the U.S., but Microsoft announced a separate content deal for Europe with MGM International and Constantin. Microsoft Interactive Entertainment Business senior vp Don Mattrick said the new agreements bring the total number of movies and TV shows available for download and purchase on the Xbox Live Marketplace to more than 10,000.

Microsoft also showcased several new games with a distinctly Hollywood feel, including a new version of "Scene It? Box Office Smash" and Codemasters' "You're In the Movies," which comes bundled with a camera and lets users create, edit and display short movies and film trailers.

E3 runs through Thursday.