A character can be designed to have sex appeal without it being something obtrusive or central to the character. It would be nice to more female characters that didn't default to needing to show more skin than usual, for example.
But it's not like I mind it for merely existing. It helps for it to make sense or serve some sort of utility for the character, but even then, it can seem contrived. That doesn't necessarily stop me from enjoying a character.
Bayonetta was designed by a woman, and reminds me of a fashion model. While some parts of the game are eye-roll inducing (like some of the dance scenes), her sexuality doesn't seem too out of line with her character. She's playful, witty, and in charge of her own sexuality, making her a bit more than a vehicle for male desire.
We have characters like Alex from Eternal Darkness who is obviously showing skin, but despite having "sex appeal", she is never sexualized as a character, and she's not wearing anything outlandish.
I really love the artstyle from Odin Sphere. Velvet on the left is obviously sexualized in her design and her art, but outside of that, that's not really central to her character. I almost like her Little Red Riding Hood/fortune teller-esque outfit. I am more partial to Gwendolyn on the right, even though one may wonder why a warrior princess would have so many exposed sections. (Mobility? All the other valkyries wear the same armor.) It doesn't make a lot of sense, but it's not terrible, even though the male characters are a lot more armor-clad. (They are still pretty bad-ass.)
I love Lenneth's design. It evokes a strong sense of femininity, yet still provides her above-average protection (although one may wonder what utility her skirt serves, which can be forgivable given that she is a goddess). She does it without needing to show off a lot of skin.
I doubt a lot of games are assuming that these women are such brilliant fighters that armor is beneath them.
One of my favorite designs is probably Zelda.
She is obviously a woman, but her sex isn't at the forefront of her character. She is clearly powerful (although I wish the games did a better job at making her seem less weak), and I always liked the subversion of her dress as Shiek rather than always being in need of rescuing.
Being a damsel-in-distress doesn't mean that they cannot be designed less obtrusively, though.
So in short, neither sexualized female characters or those with some abstract "sex appeal" need to be inherently flawed, even if they can be a bit redundant and boring. Some of them are even designed by women (although that, by itself, doesn't really mean anything). One of my favorite characters is Samus, despite her recent wave of sexualization as Zero Suit Samus. While the fact that she's a woman behind the suit may not really mean much in terms of most of the games, it's still...nice to have a bad-ass, stoic woman who is fully-armored. It's easy for a female character to fall into the somewhat lazy trope of strong and sexy, though.
When they don't exist for the mere purpose of titillation or as some bizarre sex object, they can be made into interesting characters without needing to be made androgynous. I'm all for more diverse and less-sexualized female characters, and I don't think there's anything wrong with wanting that--we clearly have enough of the other alternatives as it is. Sometimes the designs can reflect issues in the industry, the culture they arose from, or even more progressive thinking and taking a page from the perspective of someone else.
I'd say the number of gross offenders are lessening, however, and that there's more of a backlash these days as feminism is becoming slowly but steadily more accepted in the industry. I'm sure very few people actively seek to objectify or cheapen women through female characters--rather being a product of their environments--so I am mildly optimistic. I would also like to see more minorities in games, but that's another matter. I would think it would be cool to have more characters designed by women.