G3 is marketing nomenclature used by Apple. They could have called the C2D the G6 if they'd really wanted to. The Wii also uses a PPC processor. IBM saw that the potential for game console chips was higher than that for
desktop computing, so development for Apple was all but canceled, which led to Apple pulling out altogether. Note, though, that IBM still makes PPC chips for their servers, they're just not into desktop computing anymore (further evidenced by the sell-off to Lenovo).
Anyway, I think the real nail in the coffin was the switch to dual-core processors. The G4 could have eventually been clocked to 2ghz but it wasn't designed for multi-core computing like the G5 was. And it appears as though there's been a sort-of wall hit as far as clock speeds are concerned, which has brought us to multiple cores.
Remember that the original 360 SDK was, in fact, a modified Power Mac G5 and early demos were actually running on PMG5s (
link).
But 1) The X360's cores (I think there's only 1 3-core processor) aren't meant for general purpose computing, just like the PS3's cell processor and 2) MS still has/had some major design flaws in that the 360 overheats to the point of dying; proof that it was really too much heat to handle. Then think of a G5 in a notebook enclosure.