U.S. retail videogame sales in May fell significantly for the third straight month, NPD Group Inc. reported, led by a steep drop in sales of Nintendo Co. Ltd.'s (NTDOY) Wii game console.

Despite industry sales dipping below $1 billion for the first time since August 2007, the NPD results mostly met analyst expectations, which is fueling optimism that the videogame industry contraction should end by August.

NPD reported that U.S. spending on videogames fell 17% annually, to $540 million, the result of few new releases during the month and a difficult comparison to a year ago, when Take-Two Interactive Software Inc.'s (TTWO) "Grand Theft Auto IV" alone sold more than 1.3 million copies. According to NPD, THQ Inc.'s (THQI) "UFC 2009 Undisputed" and Nintendo Co. Ltd.'s (NTDOY) "Wii Fit W/Balance Board", the month's top two selling games, managed 1.03 million units combined.

Video game console sales slip was more significant, down 30%, to $302.5 million. Nintendo's DS led the category with 650,000 units sold, which is about 43% higher than a year ago. Meanwhile, sales of the Microsoft Corp. (MSFT) Xbox 360 were off 5%, while Sony Corp.'s (SNE) PS3 sale slipped 37%. However, each fared better than consensus expected.

Wii console sales fell 55% to 289,000, which was slightly below expectations.

"The videogame industry continues to struggle with difficult comparisons to last year," NPD analyst Anita Frazier said.

The $863 million in combined video game and console sales in May is a 23% decline from a year ago. Year-to-date, total U.S. videogame revenue is down 7% from a year ago.

Yet, analysts remain confident a strong slate of new game releases, starting with this month's "Sims 3" from Electronic Arts Inc. (ERTS) will lead to a return to industry growth by August.

-By Ben Charny; Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com