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Peter Davies, Ceop, says online offending is just as harmful as physical sexual abuse and has led to children attempting suicide
Live streaming of child sex abuse via webcams is an emerging threat, experts have warned, amid a doubling of reported indecent images.
The Child Exploitation and Online Protection Centre said children were being "abused to order".
Offenders targeted vulnerable families overseas, paying them to facilitate child abuse, according to its report.
Ceop said those carrying out abuse used a "hidden internet" to disguise their identity and avoid detection.
The report found the number of still and moving child abuse images reported to Ceop had doubled in the last year to 70,000 - although this includes a "substantial" number of duplicated images.
The child protection body - part of Home Office's Serious Organised Crime Agency - said it received 8,000 reports of indecent images of children being shared last year.
'Appalling crime'It said live streaming emerged in 2012 as a means of producing and distributing images.
"We're seeing cases where they're effectively being abused to order for paying customers," chief executive Peter Davies told the BBC.
He said some of those exploiting children via the internet were in the UK, adding: "At every level an absolutely appalling kind of crime."
Children were forced to engage in sexual activity on live webcams in exchange for payment to the family or organised crime gangs, according to Ceop's annual threat assessment of child exploitation and abuse .
Online video services such as Skype were identified as among those being exploited to transmit live images of abuse.
What is the hidden internet?
When information moves online, each computer's individual IP address is widely logged, potentially giving police a start in any investigation.
But some in the industry say tech-savvy paedophiles have turned to networks specifically designed to conceal the identity and location of their users.
Using a variety of technological tricks, so-called "dark nets" - Tor, I2P, Freenet and many others - hide the giveaway identifiers while allowing people to go on using the web.
Drugs, guns and credit card skimmers are openly on sale on these networks.
They are places where paedophiles, criminal hackers and professional thieves advertise their services.
However some see the hidden web as a force for good because it is used to avoid detection in many places where political protests are harshly suppressed.
Do dark networks aid cyberthieves and abusers?
Ceop said many abusers were hiding their actions deep in the "hidden internet" by using encrypted networks and other secure methods to distribute images. These methods made it harder for law enforcement agencies to trace abusers.
"The use of the hidden internet in the UK and beyond is expected to continue increasing throughout 2013, possibly reaching 20,000 daily UK users by the end of the year," said the report.
"Ceop assesses that the networking and sense of 'safe' community that occurs within the hidden internet and the relative sophistication of offenders within that environment stimulates the production of [indecent images of children] on both a commercial and non-commercial basis."
'Searching questions'An NSPCC spokeswoman said evidence from police in England and Wales indicated there were 20,000 sexual offences against children every year.
"However, we believe this is far from the true situation as many cases are never revealed," said the spokesman.
Independent charity Victim Support, meanwhile, said the police service must "ask itself some searching questions".
"Its first priority is to prevent and detect crime," chief executive Javed Khan said.
There were "inconsistencies in the way forces collect, record and categorise child sex abuse offences", he added.
"It is essential that every dot is joined up if the most vulnerable in our society are to be protected.
"Start Quote
End Quote Javed Khan Victim SupportIt is essential that every dot is joined up if the most vulnerable in our society are to be protected"
"Every police force must therefore contribute fully and consistently to the national intelligence picture - only then will we have a true picture of the scale of the problem."
Policing and Criminal Justice Minister Damian Green said: "These figures are deeply troubling and show how our understanding of child sexual exploitation has greatly improved in recent years.
"But more needs to be done. Ceop is doing excellent work and we will see its capability strengthened when it is transferred to the National Crime Agency later this year.
"I am leading a new Home Office group which is urgently looking at how we better identify those at risk."
An estimated 50,000 UK web users are involved in distributing abuse images.
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