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Microsoft said it will retain a stake in the new company and will continue to publish future Halo games and other titles, though Bungie indicated it could also make titles for gaming devices other than Microsoft's Xbox 360.

"We will continue to develop with our primary focus on Microsoft platforms," Bungie head Harold Ryan said in a statement. "We look forward to continuing that affiliation through Halo and beyond."

Microsoft bought Bungie in 2000 as it beefed up its game development efforts in preparation to launch its Xbox gaming console the following year.

"While we are supporting Bungie's desire to return to its independent roots, we will continue to invest in our Halo entertainment property with Bungie and other partners," Shane Kim, head of Microsoft Game Studios, said in a statement.

Microsoft's Xbox 360 competes against Sony's PlayStation 3 and Nintendo's Wii.

Halo 3, which launched September 25, has already racked up more than $300 million in worldwide sales, making it one of the fastest-selling games of all time and putting Microsoft's money-losing entertainment division on track to turn a profit.

The announcement follows days of speculation triggered by a reader blog on the Seattle Post-Intelligencer Web site that Bungie was set to split from Microsoft.

Microsoft shares rose less than 1 percent to $29.89 in afternoon trading on Friday.