Investigators from the Child Exploitation and Online Protection (Ceop) centre said children as young as eight have been targeted and driven to self-harm and suicide by their abusers.
In the past two years, 424 children worldwide have been blackmailed in this way, of whom 184 were from the UK, Ceop said. Experts believe thousands of British children could have been targeted by abusers.
Globally, seven youngsters took their own lives, including 17-year-old Daniel Perry from Dunfermline, who died in July after being tricked into thinking he was talking to an American girl online. He was told video conversations would be spread among family and friends unless he handed over money.
Experts believe British children are targeted due to the broad use of the English language and because foreign abusers believe the liberal nature of UK society makes it an easy target.
Ceop deputy chief executive Andy Baker said: "Children as young as eight are being targeted, being blackmailed, being extorted, being forced, being coerced, to perform slave-like acts through the internet, on webcam."
Detective Chief Superintendent Gillian Imery, Head of Public Protection for Police Scotland, said parents should talk to their children about their online activity.
She added: "It is important for all children to tell someone if anything like this happen to them. Don't keep quiet. You won't be in trouble - we will understand you and can help you."