MPs on the Scottish Affairs Committee also said it was a "golden age" of opportunity for the sector but said it faced an uneven global playing field.
In a new report on the industry, the committee said there were "compelling arguments for tax relief" and the issue should be kept under review.
The Treasury has been criticised by firms for not implementing tax breaks.
A Labour government proposal for a games industry tax break was cancelled by the coalition government in June 2010.
The head of The Independent Games Developers Association (TIGA) has said that while the games industry had grown by 33% in two years in places like Canada - where there is tax relief - there had been a 10% contraction in the UK.
Video games development is currently worth about £30m to the Scottish economy, although the market is thought to be worth more than £55bn worldwide.
'Not competing'Committee chairman Ian Davidson MP said: "The committee strongly believes that the video games interactive technology industry is potentially a world leader for the UK and the government must do more to encourage development and growth in the sector."
The report said that Scotland had an "outstanding reputation" for excellence in games production, the economic benefits of which were felt by the whole of the UK.Dundee, which plays a key part in the sector, is home to about 15 design companies.
However, the industry cut almost a fifth of its jobs in Scotland last year, including those affected by the loss of Dundee-based Realtime Worlds.
The committee blamed skills shortages, unsustainable business models and a lack of innovation as contributing factors to the UK becoming a less attractive place to invest.
Continue reading the main storyMany of our competitors... offer tax breaks for games production, often at substantial levels, so the effect of that is that it is driving investment away from Scotland and away from the UK”End Quote Dr Richard Wilson TIGA It also cited the fact that the sector operated in an uneven international playing field, disadvantaged by subsidies from governments overseas, notably France and Canada, and cheaper labour markets elsewhere.
It said the government had a responsibility to help create an economic environment in which the creative industries could flourish.
The report added: "Impediments for growth in the UK are emerging and we believe the government should make the future of this industry a priority."
However, members pointed out that although the UK sector had fallen in the global games rankings, it was behind countries like Japan and South Korea, neither of which had "bespoke, large-scale support" from government.
The report added: "German studios too have attained healthy rates of growth in spite of their government's apathy... towards video games."
Dr Richard Wilson, head of TIGA, said there had to be a strategy for growth for the industry.
He told BBC Radio Scotland's Good Morning Scotland programme: "The Scottish games industry, and the UK games industry in general, are not competing on a level playing field.
"Many of our competitors, like Canada, France and the US, offer tax breaks for games production, often at substantial levels, so the effect of that is that it is driving investment away from Scotland and away from the UK to these other jurisdictions."
'Level playing field'Mr Wilson called on Westminster to create the environment to compete in a market it is estimated could expand to be worth £80bn a year globally.
Culture Minister Fiona Hyslop said: "Much of the evidence and analysis in the report supports the case for tax relief for the video games industry - something that has long been argued for by Scotland's games developers.
"The Scottish government is listening and it is disappointing that the UK government is not.
"Until Scottish and UK-based games developers are allowed to compete on a level playing field, we run the risk of losing existing businesses to other countries and failing to attract new companies and highly-skilled jobs to this country."
