Developed by Avatar Golf studio Barkers Crest, The Avatar Legends will allow players to use their Xbox Avatars in a ten-hour single-player story campaign.
As well as pre-set content, users will be able to create their own stories, quests and maps for other players to download over Xbox Live.
Dialogue trees, item and world names, NPC animations and travel locations can all be customised by the player.
Elsewhere, dedicated multiplayer arenas can be created with unique terrain, structures and enemy settings, and playable with up to six players online.
"There are two types of sharing: single player worlds and multiplayer maps," creator Matt Davis explained to DS. "For single player, if you have created or downloaded a world you simply host a sharing session that gamers can join and then share it with them just like sharing courses in the golf game.
"The single player designer is set up in a way where your world can have as many maps as you want, so, for instance, you can have a hub world map and then travel to, say, a desert map. That's just an example and quite frankly the game is only limited by one's creativity and imagination."
Davis continued: "I love action, adventure, stories, character leveling, quests and level designers. This game is all of those rolled into one. I can't wait for everyone to get a chance to play it.
"Everyone who has had a chance to beta test the game is in love. I've poured my heart and soul into this project and I think it shows when you play it."
The Avatar Legends will be available for 400 Microsoft Points (£3.40 / $5) from the Xbox Live Indie games service later this month.
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Watch the announcement trailer for The Avatar Legends below: