Year-end sales figures released Wednesday by The Nielsen Co. show total album sales, including album equivalents made up of single digital tracks, fell to 428.4 million units, down 8.5 percent from 500.5 million in 2007.
Physical album sales fell 20 percent to 362.6 million from 450.5 million, while digital album sales rose 32 percent to a record 65.8 million units.
Digital track sales, such as those conducted in Apple Inc.'s iTunes Music Store, were up 27 percent from last year, breaking the 1 billion mark for the first time at 1.07 billion.
The report continues a troubling trend for the recording industry, which has a harder time maintaining profits when consumers buy single songs instead of albums. The number of transactions rose 10.5 percent to 1.5 billion, although the figure treats single track and whole album purchases the same.
"You can see the overall unit sales as a positive, but their model is really built on album sales and that just continues to decline," said Silvio Pietroluongo, director of charts for Billboard magazine.
"Music consumption has never been at a higher clip, it's just a matter of trying to turn it into revenue," he added.
Some record labels are making progress. Craig Kallman, chief executive of Warner Music Group Corp.'s Atlantic Records, whose artists include Kid Rock and T.I., said his label passed a milestone in the year to September by having its digital revenue exceed that from physical CD sales.
The label, the top-selling in the U.S. in 2008, has had to become more careful in choosing which artists to promote and more patient in waiting for their songs to break out, he said.
"You have to really be right about your hits. If you're going to invest that amount of time in them and not run as many records, you have to be way more right today than wrong," Kallman said.
Nielsen SoundScan said album sales fell in every genre. Classical music saw the biggest drop at 26 percent, followed by country at 24 percent and Latin at 21.1 percent.
Taylor Swift was the year's best-selling artist with more than 4 million albums sold, followed by AC/DC, Lil Wayne and Coldplay. Sugarland finished No. 8.
Swift had two albums on Nielsen's Top 10 sales list: her self-titled debut at No. 6 and her sophomore album "Fearless" at No. 3.
"Taylor Swift is a great artist development story that started as organically as you can in the digital age," said Scott Borchetta, president and CEO of her label, Big Machine Records. "It involved online, non-stop radio tours and strategic TV opportunities which led to non-stop touring. But - most importantly - Taylor connected with her fans like no other artist in 2008."
Lil Wayne had the year's top-selling album, "Tha Carter III," with 2.87 million units sold, with Coldplay's "Viva La Vida" (2.14 million) and Swift's "Fearless" (2.11 million) rounding out the top three.
The top selling digital artist was Rihanna with 9.94 million tracks sold, followed by Swift and Kayne West.
Ironically, as digital downloads grew, vinyl album sales also climbed. In 2008, more vinyl albums were purchased (1.88 million) than any other year since Nielsen SoundScan began tracking sales in 1991.
More than two of every three vinyl albums were purchased at an independent music store during the year, the company reported. The top selling vinyl albums were Radiohead's "In Rainbows" (26,000 units), the Beatles' "Abbey Road" (16,500) and Guns 'N Roses' "Chinese Democracy" (13,600).
Nielsen also reported that music sales exceeded 65 million in the final week of 2008, representing the biggest sales week in the history of Nielsen SoundScan. The previous record was Christmas week of 2007 with 58.4 million music purchases.
By AP Entertainment Writer John Gerome; Business Writer Ryan Nakashima in Los Angeles contributed to this report