I'm watching Austin Powers 2 and i saw what looks like the XM177E2 in use

when was it first developed?

Nakey

Circa 1967.

In 1966 a requirement developed in the US Army for a shortened version of the M16, primarily for use by Special Forces who needed a smaller weapon for covert use, e.g. Long Range Reconnaissance Patrols (LRRPs).  This involved jumping into jungles and so forth where a long rifle could easily be bent and was too heavy.  Colt's developed a derivative of the M16 that was initially called the XM177, that differed from the original M16 in that it had a ten inch barrel with a long flash suppressor that incorporated expansion chambers to reduce the deafening muzzle blast from the short barrel, a telescoping stock, and a redesigned round handguard held in place with a wedge-shaped slip ring to allow easier removal of the handguard halves for maintenance.  A version with the forward bolt assist favoured by the Army was called the XM177E1.  Together they were known as the "CAR-15" project, and that was the name many of the troops called them in Vietnam, although the guns were often stamped "Commando", and they are often called the Colt Commando as well.

Only a few thousand of these guns were made, due to serious problems with them.  The muzzle blast was still deafening and blinding even with the clever flash hider/suppressor, bullets would yaw and "keyhole" when hitting the target (because of insufficient stabilisation, apparently, and also debris clogging the suppressor), the cyclic rate was all over the place due to inconsistent gas pressure at the gas port (because the gas port was so close to the muzzle) and so on.

Colt redesigned the XM177 into the XM177E2 which had certain improvements such as a slightly longer 11.5 inch barrel, but it too suffered from the same problems and the Army ditched the project.  Undeterred, Colt's tried to sell the XM177E2 abroad, but the Bureau of Alcohol, Tobacco and Firearms had classified the flash hider as a sound suppressor, and in a bid to stop terrorists (supposedly, more likely the Israeli Mossad) from acquiring silencers the US Govt. banned their export, inadvertently stopping Colt's from being able to sell the XM177E2 abroad.  

Quoted: Circa 1967.

I saw it in the bit when Austin was in 1969 and they were looking for the tracker that Felicity Shagwell "implanted" in Fat Bastard's Arse

thanks guys