The chief minister of Punjab province, Shahbaz Sharif, ordered a judicial inquiry into reports that hundreds of children had been abused over a period of several years.
Local media say a gang made videos showing the abuse of children, whose parents were then subject to blackmail.
The scandal centres on a village near the city of Kasur.
Reports say about 280 children, mostly under 14-years-old, were abused and filmed, in the village of Husain Khan Wala.
Correspondents say many victims are afraid to report abuse, in a society which allows abusers to brag about their exploits but stigmatises their victims.
Police say more arrests are expected.
Analysis by the BBC's Ilyas Khan in Islamabad
Child sex abuse is widespread in parts of Pakistan, especially in the countryside.
According to one estimate, over 3,500 cases of child molestation were reported in 2014, of which 67% were reported from rural areas.
Meanwhile, many have noticed that most of the clips being investigated date back to 2009-11, shortly after camera phones first became widely available, with few recent cases being reported.
This has led some to suspect that the clips were reported to the police amid a local dispute.
One boy told BBC Urdu the abuse began when he was 11, five years ago:
"They sexually abused me in front of secret cameras... they came back a week later and showed me the video, and said if I did not do what they wanted, they would show it to my friends and school colleagues."
A woman told the BBC her son had been molested and blackmailed for five years, and she had only recently learned about the abuse:
"They used to badly treat him wherever they could get hold of him. They would snatch his mobile and money.
"They [the perpetrators] are now threatening us."
District police officer Rai Babar Saeed told BBC Urdu: "We have around 30 video clips of one incident showing six victims and seven people involved. We have arrested these seven. We are still trying to recover more videos."
He added that there was "no political motive" behind the investigations, which he said were being conducted "on merit".
Last week, more than 20 people were injured as families of the alleged victims clashed with police in Kasur, accusing the authorities of ignoring their complaints.
Saba Sadiq, the head of Punjab's child protection bureau, described the case as "the largest child abuse scandal in Pakistan's history", the AFP news agency reports.
The provincial chief in Punjab is the brother of Pakistan's Prime Minister Nawaz Sharif.

Gavin Egan, 34, was found in Peasholm Park, Scarborough, on 24 February 2016.
The Independent Police Complaints Commission (IPCC) said PC Helen Hardie "had a case to answer for gross misconduct".
The force said it "disagreed with the content of their [IPCC] report".
More on this and other North Yorkshire stories
In its report, the IPCC said an ambulance had gone to the park after a member of the public had contacted them to say he had pulled a man out out of the lake.
A paramedic searched the park for about 38 minutes but could not find the missing man, so he called the police.
PC Hardie attended the scene at about 04:00 GMT.
The IPCC report said: "A four-minute search was carried out before PC Hardie left the area, she did not seek assistance and the incident log was closed soon after."
It added that the officer concluded the missing man had fled the scene "despite a paramedic's view that he would be incapable of such action because of freezing temperatures".
She later told an inspector "there was no evidence a man had been pulled from the lake".
Mr Egan's body was found at about 11:30 GMT.
The IPCC investigator said that in his opinion "PC Hardie had a case to answer for gross misconduct".
In a statement, North Yorkshire Police said: "We disagreed with the content of their report and their finding that it amounted to gross misconduct.
"We appealed their report and it was subsequently agreed with the IPCC that a misconduct meeting would be held.
"This has been carried out and the officer has been issued with a written warning."
Seven people have been arrested in Pakistan on suspicion of involvement in child sexual abuse and extortion.
[NEXT_CONCEPT]
A North Yorkshire Police officer made "errors" in the search for a missing man who was later found dead in the lake of a public park, the police watchdog has found.