Thousands of Xbox gamers have been cut off from Microsoft's online gaming service Xbox Live because they modified their consoles to play pirated games - a violation of the Xbox Live User agreement.

Microsoft confirmed that it had banned a "small percentage" of the 20 million Xbox Live users worldwide and online reports put this "small percentage" at between 600,000 and one million Xbox Live users.  "All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox Live terms of use, will void their warranty and result in a ban from Xbox Live," Microsoft has said in a statement.

There are several reason for installing "mod chips."  These chips may be used to play pirated games, but they can still be used to play games released in and validly purchased from other regions.   Reports are that even the presence of a non-Xbox hard drive will lead to a ban.

Affected gamers are met with a message during the login process that informs them that they had been barred from the service.  The Xbox console will continue to work with offline games - but they can no longer access their Xbox Live account from that specific Xbox.  With this in mind, many are predicting a flood of used Xbox consoles may soon show up on Trademe and eBay.

The Xbox 360 is equipped with Digital Rights Management (DRM)technologies to detect pirated software.  Microsoft has declined to comment on exactly how they determined which consoles had "mod" chips or to state why this action was taken at this specific time. However, this ban coincides with the release of Activision's Call of Duty: Modern Warfare 2 and the speculation is that the rampant piracy of the game before its release triggered Activision to demand action from Microsoft.

Microsoft said that "the health of the video game business depends on customers paying for the genuine products and services they receive from manufacturers, retailers, and the third parties that support them." While Microsoft has looked a bind eye in the past - they have now taken it upon themselves to enforce the rules of video game ownership when it comes to getting online with Xbox live.