Consumer electronics deals are bringing out the crowds for holiday retail sales. But a bruising price war between online retailer Amazon.com and store giant Wal-Mart could drag down profitability across the sector.

Amazon (NasdaqGS:AMZN - News) has been slashing prices on a host of electronics, including TVs and GPS navigation devices, and Wal-Mart (NYSE:WMT - News) has followed suit with its own price cuts. Amazon and Wal-Mart started their price war in the fall with books and DVDs and it spread to toys and electronics.

Specialty retailer Best Buy (NYSE:BBY - News) and Wal-Mart are still the leading sellers of consumer electronics, but Amazon has been gaining market share. This year, Amazon will sell more electronics than Sears (NasdaqGS:SHLD - News) and Kmart combined, says market tracker Rockhopper Research.

"We're seeing a lot of retailers in electronics vying for the piece of the pie that Circuit City had last year," said Ross Rubin, an analyst with retail tracker NPD Group. Circuit City held going-out-of-business clearance sales last holiday season.

Retailers posted some aggressive offers on Black Friday, the traditional start of the holiday shopping season. Post-Thanksgiving sales included 32-inch LCD high-definition TVs for $250 at Wal-Mart and Target (NYSE:TGT - News) and sub-$100 Blu-ray Disc players at Best Buy and Wal-Mart. Wal-Mart was selling an eMachines notebook computer for $198.

Retailers hope to balance such low-priced doorbuster sale items with high-profit accessories, such as cases for laptops, wall mounts and cables for TVs, and services such as installation and insurance, Rubin says.

The price war between Amazon and Wal-Mart could take some business from Best Buy this year, says Michael Pachter, an analyst with Wedbush Morgan Securities.

"Best Buy is trying to make up for it with things like free delivery, and they're doing bundles that make it hard to compare," Pachter said. For instance, Best Buy is bundling Blu-ray Disc players with TV sets.

Amazon will grow its consumer electronics business as it encourages more people to shop online, he says. Wal-Mart is using promotional items to get consumers to equate its brand with video games and consumer electronics.

Wal-Mart also wants to drive traffic into its stores using low-priced electronics as bait. Once in the store, consumers are likely to buy other items so Wal-Mart can recover its costs from selling deep-discount items, or what are called "loss leaders," Pachter says.

The most in-demand electronics products this year are video game consoles and MP3 music players, according to a survey of more than 1,000 U.S. consumers by Rockhopper Research. The poll was conducted Nov. 19-20.

Wal-Mart is the top destination for video game consoles, with 38% of shoppers surveyed, says Rockhopper analyst Mary Samuelson. Best Buy was second with 29%, she says.

Wal-Mart also is tops among shoppers for MP3 music players, such as Apple (NasdaqGS:AAPL - News) iPods. Consumers surveyed picked Wal-Mart (35%), Best Buy (28%) and Target (9%) as their expected shopping destinations for MP3 players.

Best Buy leads Wal-Mart among shoppers polled when it comes to buying notebook, desktop and netbook computers, according to the Rockhopper survey.

Amazon.com had its best showing among survey respondents in GPS navigation devices, digital cameras/camcorders and netbooks. It came in third in those categories, with 13% of shoppers in GPS devices and cameras/camcorders and 9% in netbooks.