Microsoft is working on a new 7-inch tablet designed specifically for playing video games, according to a recent report by The Verge.

It follows rumours in June that the company was creating a new product, called the Xbox Surface, which could operate as a streaming device similar to the Wii U and PlayStation 3/PlayStation Vita combination.

Technical specifications for the device include a multi-touch 7-inch LED screen, with a maximum resolution of 1280 x720, as well as four USB 3.0 ports, an SD card slot and a processor with 288MB of RLDRAM 2.

The latest report from The Verge cites “multiple sources” who say they are familiar with Microsoft’s plans and can confirm that the initial hardware planning for the Xbox Surface is already underway. They have also claimed that the new tablet will run a custom Windows kernel, rather than the full version of Windows 8.

If the Xbox Surface really is in development, it’s a huge move for Microsoft. For a long time Nintendo has dominated the portable gaming market, giving rise to hardware classics such as the original GameBoy and Nintendo DS. Sony has also dipped its toe in the water with both the PlayStation Portable (PSP) and PlayStation Vita, although its success outside of Japan has been modest at best.

Of course, the iPad has really upset the conventional model of handheld gaming. Microsoft has put a lot of work into the Surface tablet, but hasn’t breathed a word about trying to transition into handheld gaming in particular. Xbox SmartGlass is about as close as we’ve come, although that technology has been designed to use any touch screen device.

Could Microsoft really be gearing up for a new tablet aimed specifically at gamers? If so, they’ll be entering a highly-competitive market already which is already in chaos thanks to changing consumer tastes and behaviour.