The Gekko chip, an extension of the PowerPC architecture, will be unique to Nintendo and feature IBM's 0.18 micron copper technology.
Nintendo plans to launch its Dolphin system in Q3 next year and according to IBM, the Gekko chip is in the advanced stages of development.
IBM has also admitted that although this agreement is initially for the Dolphin system, the companies will explore the possibility of using the copper-based processor in other Nintendo products.
The Gekko will be combined with a graphics chip being specially designed for Nintendo by US-based ArtX. According to ArtX chairman Dr Wei Yen, "the match between Nintendo's know-how in the video game field and the enormity of what IBM brings to the table can't be matched."
Nintendo rivals Sony and Sega have their own next generation plans, the first of which will be Sega's 128-bit Dreamcast system, which is due to be released later this year.
Sony's Playstation 2, based on a 128-bit CPU developed by LSI using 0.18 micron technology, is due out in 2001.