U.S. retail sales of video game hardware, software and accessories dropped 20 percent in July to $707.7 million, hurt especially by a sharp drop in demand for video game consoles, according to market researcher NPD Group.

NPD analyst Anita Frazier called July a “very rough month,” though she added that for the full year game sales are poised to land in the flat to down 2 percent range from 2010 levels.

The NPD Group said in its monthly report Thursday that sales of video game hardware sank 29 percent to $223 million in July from a year earlier. This includes hand-held game systems and gaming consoles like the Wii. Microsoft Corp. says its Xbox 360 was the top-selling console during the month.

Microsoft posted a drop in sales of Xbox 360 for the first time since December 2009. Sales of the console, which was the top-selling video-game player in July, plunged 37.6 percent to 277,000 units.

“This is more of a reflection of robust sales last July, which was the biggest month for unit sales of the 360 in 2010 outside the holiday months November and December,” Frazier said. Even so, NPD said the console saw its first year-over-year decline last month since December 2009.

Sales of software, or the video games themselves, fell 17 percent to $336.2 million. That’s much worse than the 7 percent decline that Wedbush analyst Michael Pachter had expected. Sales of game accessories slid 8 percent to $127.8 million.

“There is no getting around the fact that video game sales in the new physical retail channel suffered its lowest month since October 2006,” Frazier said, referring to new, packaged video games rather than used games or game downloads, which NPD does not provide in its report.

Consumers are increasing their spending to buy content in other ways such as electronic purchases of full games, mobile games and social-network gaming, Frazier said. “We have measured some remarkable growth” in those areas, she said.

When including PC games in addition to games for consoles and hand-held gaming devices such as the Nintendo DS, software sales tumbled 30 percent to $356.9 million.

Because the research firm does not include game downloads and online games in its monthly retail sales data, the numbers can sometimes show a decline even if more people are playing games on Facebook, their mobile phones and elsewhere.

But the big July decline does not bode well for video game publishers that still depend on selling game discs for a large portion of their revenue. Among the month’s best-selling games were “NCAA Football 12” from Electronic Arts Inc. and “Cars 2” from The Walt Disney Co.

July’s lackluster sales report comes less than two weeks after Japan’s Nintendo Co. cut the price of its portable 3DS gaming system to $170 from $250. The gadget, which allows for 3-D viewing without the need for special glasses, launched with much fanfare but has failed to meet expectations, due in large part to a lack of compelling games for it.

(Bloomberg news contributed to this report.)

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