By Scott Hillis

SAN FRANCISCO (Reuters) - Microsoft Corp said on Friday that Bungie, the crown jewel of its video game unit behind the hit "Halo" franchise, will become a separate company, opening the possibility that it could make titles for Microsoft rivals.

Microsoft said it will retain a stake in the new company, to be called Bungie LLC, and will continue to publish future "Halo" games and other titles.

"Now that they're free they can come up with something else and address the whole market," Wedbush Morgan analyst Michael Pachter said, adding he expected Microsoft would have a window of exclusive rights to new Bungie games.

Microsoft declined to give any details of the separation, which follows days of speculation triggered by a reader blog on the Seattle Post-Intelligencer Web site that Bungie was set to split from its corporate parent.

It is common in the $30 billion video game industry for star developers or teams of people to leave a game publisher to work on new, unrelated projects.

Faced with losing key talent, Microsoft made sure the split was amicable, Pachter said.

"What's unusual is the umbilical cord, they kept a linkage. Credit Microsoft that they knew they were going to lose a super talented group of people," Pachter said. "They turned what could have a big loss into a manageable, fair split of labor."

Microsoft shares rose 0.8 percent to $29.95 in early afternoon trading on Nasdaq.

Bungie said Microsoft's Xbox 360 would be its "primary focus," though executives added they had no immediate plans to develop for Sony Corp's PlayStation 3 and Nintendo Co Ltd's Wii.

"The Xbox has given us lot of success so, for now, our eyes are set on the Xbox 360," Bungie spokesman Brian Jarrard said. "We're not in a situation where we're running out the door and grabbing Wii and PS3 development kits.

"There's not a real intention to do that unless something changes down the road," Jarrard said.

Microsoft bought Bungie in 2000 as it beefed up its game development efforts in preparation to launch its Xbox gaming console the following year.

"Halo 3," which was released on September 25, has already topped $300 million in worldwide sales, and put Microsoft's money-losing entertainment division on track to turn a profit.

Microsoft is keeping the rights to the "Halo" franchise.

"As far as anybody should be concerned, it's business as usual with Bungie. The only difference is that they are now employees of Bungie, not employees of Microsoft," Shane Kim, head of Microsoft Game Studios, told Reuters.
© Copyright 2007 Reuters.