When an image has semantical meaning, so it is considered to be content, use an IMG tag, without sprites, and a correctly set up ALT.
When an image is just decoration, like the background of a box, background of a button, background of a menu option, etc., it has no semantical meaning, so you can just use it as a background of a SPAN, DIV, etc. from CSS. You can use sprites in this case.
The reason Image Sprite is a best practice is because of how the HTTP protocol works, and because we want to minimize the time a webpage takes to load (there are many reasons why you should want to make your site load faster, one of them is because Google incorporated a while ago site speed in it’s ranking algorithm) HTTP is a non-connection based protocol, this means that for every request the browser does a new connection has to be done and the route to the server has to be recalculated. So, if every image was in the same file, the browser saves multiple requests.
Every request the browser does is divided in steps: DNS lookup, connecting, sending, waiting, receiving. We can use firebug to see all of the requests done during the loading of a webpage.
I took a WordPress theme and measured the time taken for every image resource at each step (ok, Firebug did that, not me) and calculated that 38.8% of the time corresponds to latency (in this case latency = DNS lookup + connecting + sending), while only 14.4% corresponds to downloading data (the 46.7% remaining corresponds to waiting for the server to respond). Latency time should be minimized, since it’s not time invested in actually downloading the resources the browser needs to show.
Steps DNS lookup, connecting and sending are redundant for every static image request on the same server. So, how can we cut them off? Guess what? Using image sprites! Every image request will be grouped in only one, resulting in only one set of latency time for all the image kilobytes the browser is going to download.