Undercover police officers working for the Metropolitan Police assumed the identities of dead children and were issued fake passports in their names, it has been claimed.
Britain's largest police force allegedly carried out the practice for three decades without consulting or informing the children's parents.
According to a report in The Guardian, officers would scan national birth and death records to find the identities to use for undercover work infiltrating protest groups.
The newspaper claimed the technique was adopted to lend credibility to officers working undercover and provide them with a back story while spying. It said some officers had used the identities for 10 years.
It is claimed as many as 80 officers used such identities between 1968 and 1994.
Scotland Yard said a formal complaint had been made but that the Metropolitan police would not "currently" authorise such a system.
One officer told the newspaper that he felt like he was "stomping on the grave" of the four-year-old boy whose identity he adopted.
He said: "A part of me was thinking about how I would feel if someone was taking the names and details of my dead son for something like this."
Another told how he had adopted the identity of an eight-year-old boy who died from leukaemia in 1968.
A third officer, who used the identity of a child car crash victim, said he was conscious the parents would "still be grief-stricken" but argued his actions could be justified because they were for the "greater good".
The officers worked for the Special Demonstration Squad (SDS), which was apparently disbanded in 2008.
Keith Vaz, the chairman of parliament's Home Affairs Select Committee , which will hear evidence about undercover policing on Tuesday, said he was shocked at the "gruesome" practice.
He told The Guardian: "It will only cause enormous distress to families who will discover what has happened concerning the identities of their dead children."
Peter Bleksley, a founding member of Scotland Yard's elite undercover unit, told Sky News that the technique was "tasteless in the extreme", saying when he worked undercover they created, rather than adopted, identities.
Former director of public prosecutions Lord Macdonald called for a public inquiry into the operation of undercover investigations - warning that unacceptable practices might still be in use today.
A Metropolitan Police spokesman said: "A formal complaint has been received which is being investigated by the Directorate of Professional Standards (DPS) and we appreciate the concerns that have been raised.
"The DPS inquiry is taking place in conjunction with Operation Herne's investigation into the wider issue of past arrangements for undercover identities used by Special Demonstration Squad (SDS) officers.
"We can confirm that the practice referred to in the complaint is not something that would currently be authorised in the Metropolitan Police Service (MPS)."