I made this piece of geekery for a product review. I was trying out Quilters Interfacing which is interfacing with grid lines to facilitate the making of watercolor quilts or pixelated quilts.
You may not already know this, but when googling pixelated video game images, the term "sprite" is very useful.
Here is a 1-Up mushroom form Super Mario. Catch him and you get an extra life!
If you are highly motivated, you can read my product review at Craft Critique HERE
Quilters Interfacing is found near the cutting table with the other interfacings at your sewing shop. I found it really easy to use, except that trimming and pressing the seam allowances is a pain. My mushroom is made on a 2 inch grid. The finished pixels are 1.5 inches after sewing. You ciuld also do this really small with the 1-inch gridded interfacing so that you end up with 1/2 inch pixels.