Hitachi has said it can fit 230 gigabits of data per square inch on a disk using "perpendicular recording"
The storage industry currently makes hard drives using longitudinal recording, which is reaching its limit.
Hitachi's work means we could see one-inch hard drives holding 60Gb instead of up to 10Gb currently.
One terabyte is the equivalent of 1,000Gb - enough to hold 240,000 songs at the standard encoding rate for digital music files.
Perpendicular recording was pioneered by the late 19th century work of Danish scientist Valdemar Poulsen, who demonstrated magnetic recording with his telegraphone.
He is widely thought to have been the first to experiment with magnetically recorded sound using perpendicular methods.
The technology industry wants smaller hard drives that hold more information to go into all kinds of digital devices like portable music players.
As storage prices come down and data capacity increases, more portable devices are coming out with built-in hard drives, such as music and media players from Apple, Creative Labs, Archos, iRiver and others.
"Consumers' demand for storing more data on smaller devices has provided a strong impetus for us to pursue perpendicular recording with a greater sense of urgency," he said.
But there are limits to this process, which are fast being approached. The biggest problem hard drive technology faces is what is called the superparamagnetic effect.
This is when microscopic magnetic grains on the disk get so tiny that they interfere with one another. Often this results in reduced ability to hold their magnetic orientations. When this happens, bits of data can become corrupt.
Perpendicular recording methods overcomes the problem and aligns data bits vertically, perpendicular to the disk.
Hitachi said it would start using perpendicular recording in the next generation of its products, in 2007. Over the next five to seven years, it said, perpendicular recording could mean a 10-fold increase in data densities over longitudinal recording.
This means its one-inch drive technology could store 60Gb of data.
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Seagate also in HD stakes  with its own perpendicular recording hard drive. Hitachi's first drives to use perpendicular recording will use 2.5-inch platters, while Toshiba plans 1.8-inch drives. Seagate quietly delivered its first samples at the end of 2004.