Do any combo that keeps Zero on the ground and can end with Power Slash M. After Power Slash M, repeat the following:
Standing Forward H
H
H
H
H
Power Slash M
Combos shown in this video:
Damage
X-Factor 0 - 118 Hits - 1,187,200
X-Factor 3 - 156 Hits - 4,183,400
These types of combos appear to be able to go on indefinitely.
You must be quick after initiating the fourth H to perform Power Slash M. I'm not sure if it was too much jamming on H and/or mistimed Power Slash M, but I did run into a problem more than once where the game accepted that I performed Power Slash H instead of Power Slash M as seen in the first half of this video.
Update: According to biffotasty (aka desk), this infinite is not possible if your game has been updated with the April 15, 2011 patch.
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