Avatar Kinect has been announced by Microsoft for the Xbox 360 at the opening of the Consumer Electronics Show 2010.
Avatar Kinect is a brand-new feature that will rollout for the system in an upcoming firmware update; it basically adds a virtual chatroom that uses Kinect to the Xbox Live feature set.
Very similar to an expanded version of the PlayStation Home service, you will be able to sit with friends within virtual spaces, ranging from a tailgate party lot to a talk-show style couch to a performance stage and a beauty salon (15 environs total), and talk to each other as your Live Avatar.
The big improvement is that your Avatar will mimic your exact (or pretty close) movements AND facial expressions, as read by the Kinect camera, while the mic picks up your voice as you talk with your friends. It waves as you wave, talks as you talk. Pretty nifty.
The service will be free for those paying Xbox Live Gold members. A standard-priced Xbox Live Gold one-year payment typically costs $50-$60, although sometimes you can find it for cheaper.
Here is video of the announcement from CES 2010.