Handheld Xbox still a possibility?

There've always been rumours floating around that Microsoft had a portable, handheld Xbox in the works, something to compete with the Nintendo DS and Sony PSP.

For a while, it was thought that the Zune might be this device, but now that we've seen the Zune - most have been unimpressed - we know it is not in the same market segment as the DS or PSP. And, it should be noted, Microsoft has always denied it had a portable game system in the works.

Well, in an on-stage interview with New York Times video game reporter Seth Schiesel, Shane Kim, corporate VP of Microsoft Game Studios added some fuel to the perpetual motion machine that is Xbox Portable.

When Shiesel asked about Microsoft's plans for a portable gaming device, Kim said:
Never say never ... launching a portable device is like launching another Xbox 360 ... you have to really step back and ask, devoting whatever bandwidth and resources you would have to to make the Zune a multifunction device, is that really the best way to go?

So maybe the Zune is going to be a gaming gadget after all. The Zune seems to be having troubles getting traction against the iPod, so maybe this is how Microsoft tries to keep the device relevant.

Anyone out there used a Zune? Let us know what it's like in the comments.