After a billion-dollar chargeback for defective Xbox consoles with the ‘three flashing red lights of death’ defect, Microsoft has decided the Xbox 360 is worth less than before and slashed prices starting tomorrow by $20 to $50 on the gaming system.

The 20-Gbyte version will retail at $350, the basic Core system lists for $280, and the high-end 120GB 360 Elite system price tag drops to $450 in the United States, with price cuts twice as steep in Canada . A specially decorated Halo 3 edition will ship next month for $400 with the debut of that Xbox-only title, and the next edition of Madden NFL ’08 is also due next week.

Major competitor Sony announced a $600 80GB version of the Playstation 3 today, after cutting price tags on the 60GB PS3 by $100 last month. Sales zoomed 113% at major U.S. retailers, perhaps due to the announcement that no more PS3s with 60GB will be made.

Will this price-slashing plan build quarterly sales of the Xbox, which fell 61% compared to the fiscal fourth quarter of 2006?