UPDATE 2-U.S. retail software sales fell in January

(Adds NPD's adjustment to percentage changes to account for fact that January 2007 included five weeks of sales data)

By Jim Finkle

BOSTON, Feb 25 (Reuters) - U.S. retail software sales fell last month in a sign that consumers may be cutting back on discretionary spending as the economy weakens, an analyst with market research firm NPD said on Monday.

Total dollar volume fell 29.5 percent from January 2007, said NPD analyst Chris Swenson. The extent of that drop was exaggerated because the figures tally five weeks of sales for January 2007 versus only four weeks in 2008.

After normalizing the data, Swenson estimates that total software sales were down 12 percent.

"I already expected lower sales in 2008 given all of the releases we had in 2007," Swenson said. "That said, the slowdown in the economy may be pulling down (software sales) even further than I would have expected."

The decline is consistent with a broader trend that NPD reported last week for the consumer electronics sector. While sales grew last year at a healthy 6.5 percent from 2006 to a record $129 billion, they tapered off in the second half, particularly the last two months of the year, according to NPD.

Sales of computer equipment, flat-screen TVs, digital cameras, MP3 players, imaging equipment and other electronics products fell 2 percent to $9.6 billion in the crucial holiday season, which ran from Nov. 18 to Dec. 29, NPD reported last week.

Swenson said that prior to crunching the January software data, he had expected sluggish sales because of a tough comparison with the year-earlier period, when Microsoft Corp (MSFT.O: Quote, Profile, Research) launched two highly anticipated products, Windows Vista and Office 2007.