The videos show a blue teddy-bear like character with sharp teeth, singing about hugging and killing.
The animated character goes by the friendly name of Huggy Wuggy, leading parents and children to believe the videos are aimed at youngsters and contain no inappropriate material.
But the blue bear-like creature chases and threatens other characters in nightmarish scenarios, leaving many children upset and frightened.
The character is from a survival horror game called Poppy Playtime, but has been made into popular videos which appear on YouTube and have seemingly slipped through parental controls.
Poppy Playtime first appeared on Steam and is made by indie developer MOB Games. In it, the player plays as a former employee who is revisiting an abandoned toy factory previously owned by the game's in-universe company Playtime Co. 10 years after the staff have seemingly vanished without a trace.
It is also available on the App Store and Android store and has a PEGI 12 rating, meaning it is suitable for people over 12. Toys representing the character are sold on Amazon.
The Huggy Wuggy character has also been recreated on Roblox, a virtual community where users can create their own 3D worlds with their own game players.
One mother has told Sky News that her three-year-old tried to jump out of a window after seeing the videos.
Beth Buxton, 31, told Sky News her two daughters, who are 10 and 12, both played Roblox and watched the videos online with her three-year-old son.
She thought it was similar to Minecraft - but her son became obsessed with Huggy Wuggy.
She said:
"He got to the stage where he didn't know the difference between reality and gaming. He tried to climb up my bedroom window, saying he would die and come back to life telling me that's what Huggy Wuggy does.
"We have banned Roblox and put locks on YouTube. I have window locks being installed next week because he is still thinking about it. There are numerous terrifying characters in these games.
"He was going into school talking about killing and guns as if it was happening at home."
Primary schools concerned about Huggy Wuggy
West View Primary School in Hartlepool released a statement to parents on social media saying the character "sings worrying songs about hugging and killing".
It said:
"In one of the videos, the bear asks the viewer to take their last breath. It is a very deceiving character, as hugs should be seen as something kind and love and because of its name is able to infiltrate firewalls and filters."
They have asked parents to be vigilant while their children are on YouTube.
"Due to the name, young people may come across this character and watch a video expecting a kind bear. Also due to the name, it may slip through some internet filtering you may have in place to protect your child. Therefore, please be extra vigilant when your child is online," Catcote Academy in Hartlepool said.
In January, Deal Parochial Primary School in Kent released a statement to parents, with its head Justine Brown warning them about the videos, adding that they have seen more children "recreating a game on the playground with hugging and whispering nasty things in the recipient's ear".
Parents thought Huggy Wuggy was 'innocent'
In one video, the character offers free hugs accompanied with the lyrics: "I could hug you here forever, till you breathe your last breath together."
In another song, Huggy Wuggy invites people to "lean in for a spine breaking embrace".
One parent from Northern Ireland told Sky News that she is usually "cautious" about what her children watch online but thought Huggy Wuggy was "innocent enough" because of the name.
"When I heard my two younger kids talking about Huggy Wuggy, Kissy Missy and Mummy Long Legs I honestly didn't think anything of it, I'm very careful with my kids and internet/YouTube, I have parental controls, age restrictions/limits, passwords set and viewing restrictions in place on YouTube, Netflix etc, which limits what they can see/watch," Natalia said.
"When I heard about it from a child's perspective and what it was called, I genuinely didn't think anything of it, I thought it was innocent enough, clearly I was wrong."
Poppy Playtime and MOB Games has not responded to Sky News' request for comment.
A YouTube spokesperson said:
"These videos are not available on YouTube Kids. Additionally, on YouTube Kids, all of our parental controls are free for parents to customise the experience for their children, enabling them to control what they can or cannot see. This includes the ability to handpick the content, choose content levels by age, to block content, and more."
Roblox has been contacted for comment.
Last year, schools in the UK warned parents that children shouldn't be watching the hit Netflix show Squid Game.