Microsoft is ready to challenge Nintendo at its own game.

The software giant is putting the finishing touches on a motion control system that will essentially turn its Xbox 360 into a Wii on steroids.

Dubbed Project Natal, the system will operate with any current and future Xbox 360 and turn individuals into the controllers of the videogame console, eliminating the need for them to hold anything while interacting with the device or games that play on it. System will also recognize faces and voices.

Steven Spielberg was on hand for a news conference Monday as Microsoft tubthumped Project Natal on the eve of the Electronic Entertainment Expo, which kicks off Tuesday at the Los Angeles Convention Center.

Microsoft also unveiled a major upgrade to the Xbox’s digital movie service, making titles available in high-def without the need for lengthy downloading.

Microsoft’s push to innovate in motion control technology is the latest example of how the videogame industry hopes to court the masses with casual games that consumers can play without investing hours of time.

“We’re using the best controller ever invented: you,” said Don Mattrick, senior VP of Xbox during Monday’s news conference at USC’s Galen Center.

The casual game boom is what helped Nintendo sell 50 million Wii consoles and make it a runaway hit with players who aren’t hardcore gamers, and it’s a segment of the market that’s expected to help boost the videogame biz past the record $21 billion it reached last year.

“What Microsoft is doing isn’t reinventing the wheel, but no wheel at all,” Spielberg said during the Xbox newser.

The director, who has a development deal to produce games at Electronic Arts and is devising future titles that will work with Natal, said the system should make games more approachable and attract people who “are just too intimidated to pick up a videogame controller.” He added that despite the size of the games biz, 60% of households do not own a console.

E3 is the videogame industry’s version of ShoWest, with the major consolemakers and larger publishers parading top talent to tout their upcoming hardware and games.

Videogame designers are treated as A-list celebrities there, but traditional artists have a place at the show, too.

Paul McCartney, Ringo Starr, Yoko Ono and Olivia Harrison were on hand to promote “The Beatles Rock Band,” a version of the MTV and Harmonix franchise that should also appeal to general auds when it bows in September with 45 songs and exclusive content, including the full “Abbey Road” album, for the Xbox 360.

“The game is good, the graphics are very good, and we look great,” Starr said.

Also on hand was skateboarder Tony Hawk to push a skateboard-shaped controller that will be released with the upcoming “Tony Hawk Ride” game from Activision Blizzard.

The irony is that the controller would be made obsolete once Project Natal rolls out. Microsoft did not reveal a release date for the system or its retail pricing.

Microsoft made several other key announcements Monday:

  • The digital movie service on Xbox Live will eliminate the need to download pics onto the console’s hard drive; instead they will stream instantaneously in the favored 1080p high-definition format. Service, which includes Netflix, will be renamed Zune Video in the fall to tie in with Microsoft’s iPod-like handheld device.

The improvements in the movie service should prove especially interesting to the homevideo divisions at the studios given that Microsoft is providing yet another reason not to buy a physical disc to watch a pic at home — especially a Blu-ray disc for viewing a film in high-def.

  • The Xbox 360 has also locked down the “Final Fantasy” and “Metal Gear Solid” franchises, which had previously been playable only on the PlayStation.

  • Two new installments of Microsoft’s most successful franchise, “Halo,” are planned, with “Halo ODST” bowing in September and “Halo Reach” in 2010.

  • Last.fm will join Xbox Live’s music service, offering millions of songs for free to gold members. CBS Interactive owns the company.

  • Facebook and Twitter will join the Xbox Live service in the fall, expanding the reach of the social networking services.