The toy beads were supposed to use 1,5-pentanediol, a non-toxic compound found in glue, but instead contained 1,4-butanediol, a potentially harmful chemical widely used in cleaners and plastics which is much cheaper than 1,5-pentanediol.
On Wednesday, the US Consumer Product Safety Commission recalled 4.2 million units of "Aqua Dots" after two children slipped into comas after swallowing the toy distributed by Spin Master in Toronto, Canada.
"The coating on the beads that causes the beads to stick to each other when water is added contains a chemical that can turn toxic when many are ingested," the commission said in a statement.
"Children who swallow the beads can become comatose, develop respiratory depression, or have seizures."
There are reports of at least 13 children across the US being ill due to the toys.
Also on Wednesday, Australian officials introduced a nationwide ban on a similar kids' bead sets found to release a substance akin to the date-rape drug GHB when swallowed.
Three children were hospitalised after falling unconscious when they ingested the tiny beads on the toy, Bindeez.
China exports 60 per cent of the world's toys, totaling $22 billion overseas sales in 2006.