X-bit Labs has published an article about gaming on HTPCs, they tested the performance of several inexpensive graphics cards. You can check it out over here.
The next question is whether a HTPC, which is in fact an ordinary computer, perhaps in a nonstandard form-factor and with special software, can be used as a replacement for a modern game console? There are a lot of games available for the PC platform and some game genres, for example real-time strategies, are rare on consoles. Playing a game on a large screen with hi-fi sound can be much more fun than on an ordinary monitor, even if the latter is 24 inches wide..