According to news from Major Nelson, you can start using your PayPal account to pay buy Microsoft Points for the Xbox LIVE Marketplace. This is only available online at Xbox.com and is only in the U.S. for now - you can’t actually set up your account on the Xbox 360 itself. However, if you choose to add PayPal to your account summary page under “Manage Payment Options,” then you won’t have to enter in your credit card information online – something many folks are still wary of doing. Once it’s all set up, you can use PayPal to purchase Microsoft Points for your Xbox LIVE account. Points can be then be used on the console to buy games and other downloads.
No word yet on when this will be available for other countries, but based on the comments, it does seem like there’s quite the demand!