"Indies" will be able to create their own games, publish to the Xbox when they like, and set their own pricing, the computer giant has confirmed.
Microsoft had previously said it would only allow games from recognised publishers on the new console.
The Xbox One, the successor to the Xbox 360, is to be launched in November.
Announcing the policy change Marc Whiten, corporate vice president of Xbox, said: "Our vision is that every person can be a creator. That every Xbox One can be used for development.  That every game and experience can take advantage of all of the features of Xbox One and Xbox Live. This means self-publishing."
Microsoft plans to make further announcements about self-publishing in August at the Gamescom conference in Cologne, Germany.
The self-publishing U-turn is the first major announcement since Don Mattrick, former boss of the Xbox division, left to be head of games maker Zynga in July.
Reacting to the announcement, Will Freeman, editor of Develop, a magazine for the games developer industry, told the BBC: "This is certainly an exciting move by Microsoft and will help democratise games development.
"But making a game is one thing, getting it played by lots of people is another. What really matters is Microsoft's policy towards distribution."
Barry Meade, commercial director of Fireproof Studios, a British Bafta-award-winning games maker, said: "This will be great for diversity, good for Microsoft and good for consoles in general.
"There hasn't been enough innovation in the console sector because of the high costs of development."
Fireproof has been highly critical of console makers in the past, principally because of the high costs and bureaucracy involved in creating games for them, preferring to focus on the cheaper mobile and browser platforms.
Creating a blockbuster console game from scratch and getting it promoted in stores and online can cost tens of millions of dollars, whereas Fireproof's popular mobile game, The Room, cost up to Â£80,000, says Mr Meade.
Microsoft's original policy contrasted with that of console rival, Sony, which is seen by many developers as more "indie-friendly".
In May, Sony announced that it would introduce an indie game section in its PlayStation Store and allow self-publishing on the Playstation 4 console, also due for its UK launch in November.
In June, Microsoft stopped charging developers for updating their games on the Xbox 360 in a sign that it was responding to criticism from the indie community.
Microsoft is to allow independent games developers to self-publish on its Xbox One games console, in a reversal of its previous policy.