I'm kind of under the impression that it can. In a lot of the old fighting games from the 16-bit era, I can still recall some of the stage themes for certain characters. And for a lot of these, they were associated with difficult characters to fight. Like Sagat from Street Fighter 2, or Tung Fu Rue from Fatal Fury. Is this something that can actually be used, or is it better to simply tone down the difficulty?

I think i agree with you. Whilst I cant provide a scientific reason why it works, from my personal experience I find that calming music really helps reduce frustration. One example of this is when coding, if im doing something stressful I often listen to classical music - similarly when you phone a call centre they often play calming music whilst you wait 20 minutes at a high premium rate.

I suppose it's all about getting your mind "in the zone"... Also fighting games can have a certain rhythm to them.

I find that often I'll unconsciously start to phase out of what I'm playing, almost focusing on a point through or behind the screen and beginning to rely more on instinct than concentration.

This effect is usually the greatest in racing games, where I'll perform best when I'm hardly even looking at the screen at all but rather reacting to a vague blur.

Music can certainly change your mood, which in turn can affect your performance. I don't know if it'll make a difficult section less stressful, but I could believe that correct tuning of music would make the player be more capable of handling a difficult section -- thus making that section less frustrating.

One common example of this kind of thing is how many games' last levels have unique, dramatic themes. This gets the player keyed up and ready to handle everything the game can throw at them.

In general, if you can get your players to be "in the zone", then you're doing well. Anything that you can do to help achieve this is good, and music selection certainly has an impact here.