The announcement came after some gamers expressed concerns the Kinect camera, which can track users in the dark and has facial recognition capabilities, could allow spying by the National Security Agency or by malicious hackers.
Microsoft had originally said the Xbox One console would have required users to connect the Kinect even if the camera was not needed for a particular activity.
The decision from Microsoft finally gives users the option to disconnect it entirely, MSNBC reported Tuesday.
Earlier this year, Microsoft had also dropped a requirement that the Xbox One be connected to the Internet at all times, which had drawn intense criticism from civil libertarians.
Microsoft has publicly stated its opposition to any government request to use Kinect for spying.
"Absent a new law, we don't believe the government has the legal authority to compel us or any other company that makes products with cameras and microphones to start collecting voice and video data, and we'd aggressively challenge in court any attempts to try and force us to do so," a Microsoft spokesman told tech site The Verge last month.