There was that one legend about Atari dumping all their ET cartridges in a land-fill... Oh, nevermind.
The big urban legend in gaming when I grew up was the Leisure Suit Larry 4 myth. In school, the news spread that Larry 4 was made and then pulled from the shops because it was just waaaaaaay to rough (Larry actually got laid on screen). Other parts had it that the original disks of Larry 4 got lost and there was no back-ups.
The truth is that Larry 4 was supposed to me a multiplayer adventure but it failed due to technical difficulties.