At least 280 children were filmed being sexually abused by a gang of 25 men who blackmailed their parents by threatening to leak the videos, said Latif Ahmed Sara, a representative of the victims' families.
Children aged mostly under 14 were also forced to perform sex acts on one another in more than 400 videos made near Lahore since 2007.
"Around 300 videos of the kids have been leaked and every second child in this village is a victim," said Sara, a legal activist.
Punjab Chief Minister Shahbaz Sharif ordered an independent judicial probe into the case, amid mounting anger from rights activists and a flurry of media attention.
"The chief minister [of] Punjab has ordered a judicial inquiry into [the] incident, those involved in the case will be punished and the affected families will be provided with justice at any cost," the chief minister's office said.
In an initial report ordered by the Punjab provincial government last week and carried out by police, local authorities described the allegations as "baseless". This was rejected by media and rights activists who said the officials carrying out the inquiry were biased.
The gang allegedly attempted to extort money from parents of victims, selling clips of the videos locally for 40 Pakistan rupees each if they did not pay up.
"They made the video of my son in 2011 and we have been paying the blackmailers since then," said the mother of one of the victims. "I have seen the videos, they are disgusting."
Another woman said she came to know about her son's abuse last month when a video of him was leaked.
"He was terrified, he had been subjected to sexual abuse for the past two years, today we went to the police station to file a report."
Local police reject the allegations of abuse, saying a group of young boys in their early 20s were making videos of "consensual" sexual acts for fun.
