Confirming numerous rumors surrounding a cheaper baseline PlayStation 3 SKU, Sony has announced it will start selling a 40GB version of its PlayStation 3 gaming console in Europe beginning October 19 for €399.

The price cut will come at the expense of features, however. The 40GB model will have two USB ports rather than four and no flash card memory slots. But perhaps more significantly, the new edition of the PlayStation 3 lacks any kind of backward compatibility with PlayStation 2 titles, either through hardware (like the first PS3 models) or software (as in the more recent 80GB models).

Sony said the decision to drop PS2 compatibility came from feedback from "later purchasers" of the PlayStation 3, who placed less importance on PS2 compatibility than on other features. When you consider the built in Blu-ray drive and Wi-Fi connection, a €399 PS3 actually looks like a good deal - assuming you want to watch HD movies.

It's difficult to tell if the recent price drop will be enough to drive console sales into the holiday season, but Sony knows it urgently needs to make changes and lower prices to stay competitive. The company did not reveal if the 40 GB PlayStation 3 will see a U.S. launch.