Microsoft could be joining the increasingly crowded 7-inch tablet market with its own gaming-oriented offering.

Dubbed the 'Xbox Surface', after its recently released 10.6-inch tablet, sources close to the website The Verge have said the device will likely feature a custom ARM processor and high-bandwidth RAM designed specifically for gaming.

The website also suggests that part of the Xbox Surface is being developed at Microsoft's offices in Silicon Valley where the company recently locked down several Xbox-related buildings - suggesting increased testing of the tablet and allowing other parts of the Xbox team to build games and software for the device.

If the rumors are true, Microsoft will be joining Amazon, Google and Apple in the 7-inch tablet space.

Google recently released its Nexus 7, alongside Amazon's Kindle Fire HD and Apple's iPad Mini.

However, unlike these other devices, which are perfect for reading books and browsing the Internet, Microsoft could tap into its vast Xbox community to give it an edge in tablet gaming.

Hardware

Microsoft's Surface tablet went on sale in October 26, but plans for a version focused on video games have been circulating since June.

A leaked spec sheet for the device suggests that the Xbox Surface will be powered by a 3.1GHz processor with 5GB RAM and custom GPU from AMD with 1.2GB memory.

The device will also have 250GB of storage, support for up to four wireless game controllers, four USB ports, HDMI and S/PDIF out and an Ethernet port.

The audio also looks impressive, and could support 64-bit processing with Dolby Digital 5.1 and 22.2 surround sound.

Competing with Sony and Nintendo

The 7-inch size is much more suitable for gaming than the larger 10-inch devices, allowing the tablet to be used in landscape more comfortably.

Sony and Nintendo are the current leaders in the handheld gaming market with their PSP and DS devices. However, Microsoft, with successful franchises such as Halo, Forza, Fable and Gears of War, could pose a serious threat.

Nintendo DS has sold 152m units since its release and Sony's PSP has notched 75m in sales, which means a potential market of 200m handheld gamers for Microsoft.

Nintendo is already making tentative steps into producing tablet/gaming hybrids with its latest Nintendo Wii U console.

The Wii U comes with the Wii U GamePad which behaves much like a standalone touch screen tablet when not being used as a controller. Microsoft could potentially release the Xbox Surface alongside its next generation Xbox 720 console, which is also in the works, linking the two devices together much like the Wii U and the Wii U GamePad.