The Child Exploitation and Online Protection Centre (CEOP) said it had conducted 12 investigations over the last two years which involved this worrying trend -- and suggested British children are particularly at risk.
Paedophiles pretending to be children target their victims on open chat sites, before moving them into private areas where they persuade the child to send sexual images of themselves.
"Once the child has sent images, the offenders begin blackmailing them either for more indecent images or, in few cases, for cash," the centre said in a statement.
In some cases, the children are also forced to perform other acts live on a webcam, including writing degrading statements on their body and cutting themselves, it said.
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CEOP said it had identified 424 child victims of online sexual blackmail over the last two years, through its own work and that of its international partners.
Seven children were driven to serious self-harm and seven killed themselves, it said.
"The stories we hear are truly tragic and you cannot help but be touched by the emotional rollercoaster these youngsters must be going through," said Andy Baker, deputy chief executive of the centre.
"They (the abusers) are able to threaten the children if they can communicate to them," she said.
She added, "The offenders have actually said that because they perceive the UK as a very free and open and liberal society, they think that they will have more success in targeting UK children."
No-one at CEOP was immediately able to give details on the nationalities of the other victims, or which other countries were involved in their research.