A nursery worker has been charged with four counts of sexual assault and three counts relating to the distribution of indecent images of children.
Vanessa George, 39, of Plymouth, Devon, was arrested at her home in the Efford area of the city on Monday night.
Police said they believed some images found may have been taken inside the Little Ted's nursery where she worked.
Ms George is in police custody and due to appear before Plymouth Magistrates' Court on Thursday, officers said.
As well as the sexual assault charges, Ms George faces one count each of making, possessing and distributing indecent images of children.
Little Ted's nursery, in Laira, remains closed.
Russ Middleton, head of CID at Devon and Cornwall Police, describes the investigation
About 40 police officers are working on the case, including internet crime investigators. Children's care specialists are also involved in the operation, police said.
At a police press conference on Wednesday afternoon, Ch Supt Jim Webster of Devon and Cornwall Police said officers realised it was a "very sensitive issue" and a "significant and distressing situation".
Police said work was under way to identify the children in the images, some of which were found on a camera phone, but added it was possible that not all of them would be traced because some pictures were only of torsos.
However, Det Ch Supt Russ Middleton, head of Devon and Cornwall CID, told the conference: "It is safe to say we believe some of the images were taken in the nursery, but others... it is impossible to say where that may be."
The nursery remains closed
Police added that they were to carry out investigations on computer equipment that had been seized, and that a caravan near Harlyn Bay, near Padstow in Cornwall, had been searched as well.
Plymouth City Council and the NHS in Plymouth said that support would be provided for the children and families who used the nursery.
The council's director of Children's Services, Bronwyn Lacey, said about 95 families were being contacted.
She said: "Our plan is that today every family that we know about will have had either a phone call or a visit by a social worker and a police family liaison officer."
Police said they were continuing to speak to staff and parents of children who used the nursery.
About 100 people attended a meeting on Tuesday evening held by police and local council child care staff for parents whose children attended the nursery.
Bronwyn Lacey, director of Children's Services, says they have contacted families
Ch Supt Webster said: "Last night's meeting was well attended by those people associated with the nursery and we took the opportunity to allay their fears where possible and also further the police investigation into the allegations.
"We will continue to liaise with local groups and people associated with the nursery and are committed with our partners to update concerned and interested parties at the earliest opportunity."
Police gave no indication as to when the nursery, which caters for about 60 children, would reopen.
Ms George was arrested after Devon and Cornwall Police were contacted by officers in Manchester after a 38-year-old man from near Rochdale was charged in connection with the investigation.
The man, from Littleborough, appeared at Trafford Magistrates' Court on Tuesday charged with possessing and distributing indecent images.
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