Engadget has it from a trusted source of theirs that Sony Ericsson is working on "a brand new gaming platform, ecosystem, and device" which Engadget says will "redefine gaming" on Android. The article mentions that the device is in the final stages of planning and appears to be a cross between the PSP Go and a Samsung Captivate.
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Hardware and software wise, Engadget believes the phone will have a display between 3.7" and 4.1" with WVGA or better resolution, a 1GHz Snapdragon processor, 5MP camera (subject to change), slide-out gaming controls including a D-pad, touchpad, and the usual PSP buttons. The phone will probably also run Android Gingerbread with a custom skin.
The phone will have a black exterior with silver highlights , come branded as a Xperia and Playstation device, and may launch as soon as October. The games that are being rumored to come along with the device include "God of War, Call of Duty: Modern Warfare, and LittleBigPlanet", along with other titles that will include augmented reality.
Phandroid mentions that the phone will bring with it "a new section of games tailored for the device to the Android Market. Initially these games will only be available for the SE/PS device, and will be graphically equivalent to what we see in PSP or PSX titles."
Google and their partners are starting to push Android as a legitimate game platform, so it makes sense to me they would reach out to Sony for help. We already saw the two buddy up for the launch of the first Google TV set, so the relationship between the two companies appears to be growing. Other sources have claimed a Google Games service was coming and we have seen Google beef up their gaming staff, so anything is possible right now.
Android Central notes that "no mention was made of what carrier(s) the phone would arrive on or in what countries, so it is wide open at the moment. Still, this looks to be where Sony is aiming for their future mobile gaming efforts."
Image from Engadget