U.S. retail video game sales fell 5 percent in May after a big slump in April. The launch of two blockbusters — Take-Two Interactive’s Red Dead Redemption (pictured above) and Nintendo’s Super Mario Galaxy 2 — weren’t enough to lift sales above last year’s relatively weak May numbers.

Sales are being closely followed these days, partly because game publishers increase or trim their payrolls based on how well sales are doing. And a lot of observers wonder if traditional video games are taking a hit from rivals that include iPhone games, Facebook games, and online games such as World of Warcraft.

Market researcher NPD said overall U.S. video game revenues were $823.5 million, compared to $865.7 million a year ago. Hardware sales were $241.5 million, down 20 percent compared to $303 million a year ago. Software sales were $466.3 million, up 4 percent compared to $450.4 million a year ago, and accessory sales were $115.7 million, up 3 percent compared to $112.3 million a year ago.

The overall sales were supposed to be a welcome relief for the game industry, which began to wonder what went wrong after April’s U.S. game sales fell a disastrous 26 percent. A year ago, overall U.S. sales in the month of May were weak, down 23 percent from May 2008 due to the recession. But at least software sales were up.

Anita Frazier, an analyst at NPD, said that the overall decline was due mainly to a drop in hardware sales, which had a tough comparison to a year ago because of the launch of Nintendo’s DSi handheld in May 2009. But NPD acknowledged that its sales numbers do not capture online revenues. At some point in the future, the market researcher will release limited online revenue data, either quarterly or twice a year. About 43 percent of the games sold at retail this May were online capable, compared to 37 percent a year ago.

Nintendo led the console battle with sales of 334,800 Wii consoles, up from 289,500 units a year ago. Microsoft sold 194,600 Xbox 360 consoles, up from 175,000 a year ago, while Sony sold 154,500 PlayStation 3s, up from 131,000 a year ago. Nintendo sold 383,700 DS handhelds, down dramatically from 633,500 a year ago, while Sony sold 59,400 PlayStation Portables, down from 100,400 a year ago. Both the PS 3 and Xbox 360 platforms saw sales increases in May compared to April.

It’s no surprise that the biggest video game in May was Red Dead Redemption, the Wild West open world game that I consider to be the best video game released so far in 2010. It shows that taking more than five years to build a game — and spending perhaps $100 million in doing so — can still result in a big payday. Ben Feder, chief executive of Take-Two, says the results so far are reinforcing the company’s strategy of investing in high-quality games. In its first month, Red Dead Redemption exceeded the lifetime sales of its predecessor, Red Dead Revolver, launched in 2004.

At the same time, not every high-quality game sells well these days. Alan Wake, an excellent psychological thriller game from Remedy Entertainment for Microsoft’s Xbox 360, took almost six years to make. It sold relatively poorly during its debut month. That game featured great storytelling and a unique kind of game play (where you used light to vanquish nightmare creatures of the dark) and was perhaps too novel for both hardcore and mass market fans. Alan Wake was No. 8 on the bestseller list, but it sold less than the 192,300 number for the fifth-highest title.

Red Dead Redemption, on the other hand, took the top two of the top 10 slots with Xbox 360 and then PS 3 versions. Overall sales of Red Dead Redemption were 1.5 million units. The top 10 games consisted of four Xbox 360 titles, two PS 3 titles, three Wii titles, and one Nintendo DS title. The No. 3 game, Nintendo’s Super Mario Galaxy 2, sold 567,100 units, which is fairly weak for the launch of a new Mario game.

Sony spokesman Patrick Seybold crowed about how this was the tenth consecutive month of sales growth for the PS 3. Hardware sales for the PS 3 were up 18 percent from a year ago, and software revenues are up 58 percent from a year ago. Seybold said that a shortage of PS 3s impacted sales in recent months, but now Sony has a wider availability of the product.

Sony is launching its new Move motion-sensing controller in September. And its big games coming this year and next year include Gran Turismo 5, Killzone 3, Twisted Metal, and Infamous 2. Sony is also promoting stereoscopic 3D TVs for use with its games.

Microsoft said that May is typically weak since a lot of industry attention falls on the E3 trade show in June. It noted that the Xbox 360 continued to outsell the PS 3, with total Xbox 360-related sales coming in at $254 million. About $156 million was spent on Xbox 360 games. Microsoft in June introduced a $299 slimmer version of the Xbox 360 with a 250 gigabyte hard disk drive and lowered the prices on its Xbox 360 Elite console (cut to $249 from $299) and  the Xbox 360 Arcade (cut to $149 from $199).

Microsoft said it is seeing “unprecented demand” for the new Xbox 360. In November, Microsoft will introduce its much-anticipated Kinect motion-sensing system.