LEDs are low-current devices and not all of them need 5V.
This one from RadioShack operates at 1.2V and 29mA. You can run it off 1.5V but you'd need a 50-ohm resistor in series to limit the current to 30mA.
So you can power it with one AA or AAA battery. Don't use 9V batteries (even if you divide the voltage down) because of their low capacity. For Energizer alkaline batteries, the 9V has 625mAh while the AA has 2850mAh. Do the math and that battery can last (theoretically) 95 hours.
Why are you guys making a new sensor system? Is it supposed to out-perform Nintendo's sensor bar?