Consumer New Zealand says a face paint kit with a high lead level has simply fallen through the cracks to reach shop shelves.
The Chinese-made Carnival Colours kit has been on sale in New Zealand for about three years.
Tests have picked up that a yellow paint in the kit contains lead. The product, which sells for about $2, is being recalled.
Consumer New Zealand chief executive Sue Chetwin told Radio New Zealand's Checkpoint programme on Monday that hundreds of the items have probably been sold.
"We've said it before about these two dollar and three dollar shops, all these very heavily discounted novelty shops that there's not enough policing of the items that are actually for sale in there where there could be some safety issues for children."
Ms Chetwin said tests are being done on a number of face paints and further results should be available in a couple of weeks.
Consumer New Zealand said lead is not permitted in face paints or cosmetic products, other than at trace levels considered to be unavoidable at manufacturing.
The importer, trading as Translucky International, said it found out about the lead last week.
Director David Wang said it bought the product in bulk about three years ago from a company that has since gone bankrupt.
Mr Wang has asked stores to bin any product still on the shelves. He said 500 kits remain unsold.