Microsoft saw $1 billion (£487.5 million) wiped off its profits during the second quarter after the US computer giant was forced to cover manufacturing problems with its Xbox 360 games console.

The company announced profits up from $2.83 billion in the second quarter last year to $3.04 billion in the three months to June 30, which strips out the $1 billion charge to fix its game consoles.

Microsoft declined to outline what difficulties it has encountered with its Xbox 360, but said that the problems had now been fixed after earlier this month extending the warranty on the console to three years after many were hit by "general hardware failure".

Revenues in Microsoft's gaming division fell by 10 per cent to $1.16 billion during the second quarter.

The depth of the difficulties have been revealed at a critical time in the highly competitive consoles industry.

Nintendo's Wii gaming system has stolen market share from the rivals Sony, maker of the PlayStation, and Microsoft.

This month Sony cut the price of its PlayStation 3 console in the US from $599 to $499.

In response, Microsoft said that it would reduce the price of the Xbox 360.

Overall, Microsoft achieved a 13 per cent rise in revenues during the second quarter to $13.37 billion, above analysts' expectations, because of strong demand for Vista, its operating system.

Web advertising increased by 33 per cent to $544 million but its internet services division recorded widening losses to $239 million from $187 million in the second quarter last year.

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