London's Metropolitan Police stole the identities of some 80 dead children and issued false documents in their names for use by undercover officers, Britain's Guardian newspaper reported on Sunday.
The force authorised the practice over three decades for officers attempting to infiltrate protest groups, without informing the children's parents, the broadsheet said.
Its investigation described officers creating aliases based on the dead children's details and being issued with documents such as passports and driving licences in their names.
Some officers reportedly spent up to a decade pretending to be these people.
Scotland Yard said it did not currently authorise the practice and had launched an investigation into "past arrangements".
"We appreciate the concerns that have been raised," the force said.
"We can confirm that the practice referred to in the complaint is not something that would currently be authorised."
Keith Vaz, chairman of the British parliament's home affairs committee, described the practice as "gruesome".
"It will only cause enormous distress to families who will discover what has happened concerning the identities of their dead children," he told the Guardian. "This is absolutely shocking."
One unnamed officer, who adopted the fake identity of Pete Black while operating undercover in anti-racist groups, told the newspaper he felt he was stomping on the grave" of the four-year-old boy whose identity he used.
Another argued that the practice could be justified on the grounds that it was for the "greater good".
Both officers worked for a Scotland Yard unit called the Special Demonstration Squad, which was disbanded in 2008.
The Guardian said it had seen a document indicating that around 80 officers used dead children's identities between 1968 and 1994.