Police have contacted more than 100 families whose children attended Jack and Jill Childcare in Torquay, although around a dozen are believed to have been directly affected.
Devon and Cornwall Police said it received allegations of sexual assault on 29 July and arrested a male suspect in his teens.
Acting Det Ch Insp James Stock said officers had reviewed more than 250 hours of footage from the nursery.
“As a result of CCTV enquires, a number of children aged two and over have been identified as potential victims of contact offences,” he added.
“The contact appears to be limited to within the nursery setting and we do not believe that any other member of staff had knowledge of these matters.
“These appear to be the actions of a lone individual, and the offences do not involve the taking or distributing of any images.”
Police said all parents and guardians whose children attended Jack and Jill Childcare in the period under investigation had now been contacted.
Specialist public protection officers and social services have visited the homes of children who may be victims and are receiving support, investigators said.
The suspect has been released on bail until later this month under conditions banning him from entering the area around the nursery.
A/Det Ch Insp Stock said: “I can provide reassurance that the individual concerned was immediately removed from the setting and given strict bail conditions as part of their release from custody. They have since been moved out of the force area whilst the investigation continues.”
Police, the local council, NHS and Ofsted are involved in the ongoing investigation, which includes wider concerns over safeguarding at the nursery.
Ofsted has suspended Jack and Jill Childcare’s licence while the work continues.
Nancy Meehan, deputy director of Torbay children’s Services, said: “We take safeguarding children incredibly seriously, and we are working closely with partners including the police in relation to this matter.”
A helpline has been set up by the Torbay Safeguarding Children’s Partnership, on 01803 208820.