The cut is the division's largest single layoff since Microsoft launched Xbox in 2001, although the company has cut hundreds of games jobs over the past year.
A Microsoft spokeswoman says the company no longer has to make as many Xbox games, because third-party developers are filling the pipeline with an abundance of games.
Microsoft's game-development group started out making games for PCs.
The division grew from 350 employees to a peak of 1,200 after the Xbox was launched. The group was down to 1,000 before the layoffs.
(Copyright 2004 by The Associated Press. All Rights Reserved.)