Ever since Microsoft confirmed that new Zune hardware would be arriving in 2009, rumors have been floating around on just what the device may entail. Some speculated about a possible response to the iPhone, which Microsoft categorically denies, while others expect a touch-enabled media player with souped-up specs and some gaming capabilities. Team Xbox is inclining more towards the latter, and in fact claims to have sources inside Microsoft who have confirmed the device “sits somewhere in-between the Xbox and Zune.”

Internally codenamed “xYz,” alluding to the bridge between platforms, the device will reportedly offer mobile gaming and multimedia playback along with internet access in a portable form factor. A variant of graphical interface found in the New Xbox Experience will reportedly make its way onto the handheld. Team Xbox goes on to note that the device will blur the lines between the Zune, Xbox Live and Sky marketplaces under the Live Anywhere tag, so that users can – for example – buy a song, movie or even XBL Arcade game on the Xbox and play the content later on the handheld or the other way around.

The source also claims the new device will have “hardware features not found on any handheld on the market,” which could be seen as somewhat in line with previous rumors of it being powered by an Nvidia Tegra chip. All in all, the device described by Team Xbox sounds really attractive and should target Apple, Nintendo and Sony all at once. Hopefully, Microsoft will have something to say about it at E3 next month.