Lua is widely used as a scripting layer on top of a game engine. The intense calculations needed to generate a high-fidelity simulation like graphics and physics are usually implemented in the engine in C++, and then the game logic/item behavior/etc. is defined in Lua. I haven't heard of anyone using pure Lua for a whole game, including the engine. It'd be really interesting to see what it looked like if someone did so.
After all, that's kind of the point of Lua. Write all of the performance-critical / low-level stuff in C or C++, expose it to Lua, then orchestrate it from a Lua script. Lua's C API is very pleasant to use.
As a standalone scripting language, I found it rather awkward to use when compared to, say, Python or Perl. It was only when using it as an embedded scripting language (not on a game, though) that I could really see it shine.
When using LÖVE you have to write a lot of stuff in pure Lua because LÖVE is a framework and not an engine. So, for instance, if you wanna do AI you have to write everything about it yourself (without calling any of LÖVE's functions because generally they won't help you with this task), and most people will do it in Lua only.
