I personally believe that music is tantamount in horror games but you bring up a good point (one which Yahtzee addressed as well) that music can give away a dangerous situation. A good example is Silent Hill 1 where the radio, though creepy sounding made sound when enemies were close. I think a game that better utilized sound was the original Resident Evil. I didn't like wandering around in that house with low ammo, hearing that awful music (it was great ^^). Also, though technically not a horror game, Metroid 2 had some very unsettling music late in the game which set the mode effectively.