The charity Christian Aid, working with investigators in India, found children as young as seven routinely stitching footballs for export to Britain. They also found 10-year-old boys in small workshops manufacturing items such as boxing and cricket gloves.
Clare Short, Secretary of State for International Development, said the report, A Sporting Chance, made "disturbing reading".
She immediately promised to strengthen the Government's support for the International Labour Organisation's programme on eliminating child labour and to support the efforts of British business to promote ethical standards in commerce.
Martin Cottingham, the report's author, said what was needed was improved adult pay and conditions so that child labour can be phased out, as has already begun to happen in Pakistan.
He said a consumer boycott or switching suppliers was not the answer. "Lost business could mean lost jobs for adults and could drive vulnerable children into more dangerous and degrading work."
He asked major companies like Mitre, Umbro and Adidas to use their money and muscle to persuade existing suppliers to implement basic minimum labour standards.
Many have already committed themselves to phasing out child labour, but Christian Aid wants tougher action sooner.
Researchers visited 13 factories and small workshops, two tanneries and more than 30 other places where footballs were being stitched.
Despite frequent denials that child labour existed, they found widespread evidence of children working, often in hazardous conditions.
Upala Banerjee, one of the researchers, said: "It was very shocking. We could see children sitting in hunched positions working in dimly lit rooms or tanneries where the whole atmosphere was polluted.
"We even saw a lot of rugby balls being stitched. The irony is that in India we don't play rugby."
One 11-year-old girl, Sonia, was found making a Manchester United football bearing a picture of Eric Cantona for an average wage of 24 pence a day.
The report said: "If these products were counterfeits they were very good ones - identical in every detail to those that sell in the club's official souvenir shop for pounds 9.99."
Families in her village work mainly for Mayor and Co, India's biggest sports-goods exporter, and a key supplier for Mitre, Britain's leading football maker and official supplier to all premiership clubs except Chelsea and Manchester United.
A 12-year-old boy, Pintu, was said to have worked for two years as unpaid assistant to help his father tan the leather used for a variety of sporting goods. Between them they worked 17 hours a day for an effective pay rate of 8p an hour.
The report said that the leather was supplied to some of India's biggest manufacturers, including FC Sondhi who manufacture cricket balls for Alfred Reader - the official supplier for England test matches.
Britain is the single biggest export market for India's sports-goods industry.
A Mitre spokeswoman said they disputed some details but welcomed the report for its "balanced approach". They were happy to work with Christian Aid and other bodies, including a new committee in India, to tackle the problem.
A Manchester United spokeswoman said: "At the moment, we haven't got a statement to make." But Christian Aid said the club had made checks and obtained an undertaking from its supplier that child labour was not being used.Reuse content