Crytek has presented during the SIGGRAPH 2009 a new technique used in CryEngine 3 and called Light Propagation Volumes. This technique is based on the fact that it is sufficient to have only one bounce of indirect lighting to introduce the visual veracity even for movie production quality.
You can find all technical details in this WHITEPAPER (PDF).
This chapter introduces a new technique for approximating the first bounce of diffuse global illumination in real-time. As diffuse global illumination is very computationally intensive, it is usually implemented only as static precomputed solutions thus negatively affecting game production time. In this chapter we present a completely dynamic solution using spherical harmonics (SH) radiance volumes for light field finite-element approximation, point-based injective volumetric rendering and a new iterative radiance
propagation approach. Our implementation proves that it is possible to use this solution efficiently even with current generation of console hardware (Microsoft Xbox® 360, Sony PlayStation® 3). Because this technique does not require any preprocessing stages and fully supports dynamic lighting, objects, materials and view points, it is possible to harmoniously integrate it into an engine as complex as the cross-platform engine CryEngine® 3 with a large set of graphics technologies without requiring additional production time. Additional applications and combinations with existing techniques are dicussed in details in this chapter