Police Officer Rai Babar Saeed said a gang of 20 to 25 people had abused the children between 2009 and 2014 in the village of Hussain Khan Wala in the Kasur district.
Chaudhary Hamid, a villager, said the gang blackmailed the children into engaging in sexual activity again and again to stop the videos from being leaked. Parents were also blackmailed, he said.
At least one CD shop in Kasur had been selling the videos, Saeed said. In most of the videos, the faces of criminals are not shown, but the child's face can be seen clearly, the officer said.
Latif Sara, a lawyer representing parents of the abused children and the head of a nongovernmental organization called Children Abuse Protection, said 274 videos had been circulated.
According to a survey by the group last week, one in three of the 500 households questioned in the district of Kasur had a child who had been sexually abused, Sara said.
CNN affiliate Geo TV reported
higher numbers, saying around 400 videos were made of 280 minors.
Members of the local Farmers' Association are leading protests calling for justice for their children.
"The world's media is here, but the government has still not taken proper action against the atrocities that have occurred over here," protester Muhammad Hussain told CNN.
The Punjab chief minister's office ordered a judicial inquiry, according to a statement.
The statement said the suspects are between the ages of 14 and 25 and have been charged with sodomy and extortion.
U.N. children's agency UNICEF said the reports of children being sexually abused over several years in Kasur district were "appalling," and that it was in contact with the Pakistani government about the case.
"Our sympathies are with the children who have been victims to this abuse," said Philippe Cori, UNICEF deputy regional director for South Asia.
"It is vital that the children and families affected are immediately offered the necessary care and protection that will prevent further victimization and allow the difficult process of healing to begin."