The 360 will support 1080p

It's definitive, the Microsoft xbox 360 will support 1080p (1080 lines in progressive scan) both for videos, and for games.
It will be added though an update that will be available soon for those connected to xbox live and if you buy a xbox 360 later on.

As you remember, current configuration lets xbox 360 output video at 1080i or 720p. You will output the 1080p signal using component cables, VGA, or HDMI in the future (if it's finally released)

Existing titles will be scaled to 1080p if you wish, and in the future, game developers will decide whether supporting 1080p as working resolution, or 720p and give the 1080p possibility by rescaling.

It also means that the upcoming HD-DVD player for xbox 360 will play video at 1080p as well.

Now, this is the only thing PS3 had against MS 360, the only thing they could show off because their first next-gen console didn't support, now it does.
Personnally, I'm so happy after reading this, cause I feel very proud of having bought a xbox 360. Every day it looks better, and by the online updates, everyday you can enjoy something new. This time I won't be able to run anything at 1080p cause the biggest screen I got at home is 19' (at 1280x1024, something like 720p at 4:3), but who knows at the future? Now I won't need to buy a PS3 to enjoy 1080p in the case I get a 1080p screen (which will be in any case far in the future seeing their prices)

Check the original source at Gamespot.