Trade association TIGA has revealed a 9% drop between July 2008 and September 2010, compared to global software sales rising 16% in the same period.
"At a time when the global video game industry is growing, the UK development workforce is declining. A key reason for this decline is that video game developers in the UK are at a competitive disadvantage," said TIGA CEO Dr Richard Wilson.
"Many of our key competitors provide tax breaks for video games production. No such tax breaks for games production exist in the UK. Investment and jobs are drifting away to other countries.
"The UK video games industry is a high technology, high skilled, export oriented and environmentally friendly sector that can be world beating with the right government support."
Wilson added that prime minister David Cameron was "missing a trick" on unveiling plans to transform London's East End into a hi-tech rival to Silicon Valley, and said that it should look at tax relief and improving research & development tax credits to help high-technology firms.
> Feature: Taxing Times for the UK Gaming Industry