I think that if I had to decide which is better, I would choose Performance. Take the XBOX 360 for instance: It has obscenely good graphics, but not one of the games released has made me want to get a 360 :. If you take a game like Counter Strike 1.6 Versus Counter Strike: Source. The major fan-base is for 1.6 simply because it is more fun. I got Source, and played it for about a week, and then went back to 1.6, becasue source doesn't have the same good feeling.
I agree with D_man HL2 would be nothing without its great graphics, but the performace is truly what counts.
I take if from a mapping perspective: I first think about my layout, and whether the map will be fun to play before I add the bells and whistles. Not everyone maps this way of course, that is why most custom Source maps have crappy gameplay, people get too caught up in making them look pretty or realistic.
I think I've said enough. Hope this helps your paper rimmy.
Edit: Just thought I would add that Games like PacMan, Donkey Kong, Mega Man and Super Mario Bros. are still fun even though they run on an 8-bit system. That shows that graphics aren't the sole decider in the quality of games.