The ban across Australia's six states and two territories came after three children became severely ill after they swallowed the toy beads called "Bindeez."
Toy importer Moose Enterprise issued a voluntary recall of "Bindeez," named Australia's 2007 Toy of the Year, saying some batches of the beads failed to match the approved formula.
Authorities in Hong Kong also took steps to test the product on toy safety and dangerous drug concerns.
The "Bindeez" toy involves arranging tiny, multi-coloured beads coated with a non-toxic glue into shapes, which are then sprayed with water to fix them together.
But instead of the safe chemical 1,5-pentanediol being used, the potentially dangerous chemical 1,4-butanediol was introduced in the manufacturing process. When ingested, 1,4-butanediol can metabolise into the date rape drug known as fantasy or GBH ("grievous bodily harm").
Three Australian children suffered seizures and needed intensive hospital care in the past two weeks after eating the plastic beads.
The fair trading minister in New South Wales, Australia's most populous state, said an investigation was under way to determine how batches of the China-made beads did not match the approved formula.
"The issue of how a dangerous substance was used in these beads and not the non-toxic substance... that is going to take us a few more days to uncover," Minister Linda Burney said.
She added that customers who bought the toys would have their money refunded, at a cost of millions of dollars.
Moose Enterprise said tests had shown that some batches of the beads did not "exactly match the laboratory tested and approved formula".
A media relations manager for the toymaker, Peter Mahon, said that around a million products would be recalled, and that while "Bindeez" toys were sold in various other countries, the contaminated batches were most likely confined to Australia.
Despite this, the repercussions of the ban were being felt around the region, given broader concerns over the safety of China-made products. More than 20 million toys made in China have been recalled worldwide in the past four months due to potentially dangerous levels of lead and hazards posed by small magnets.
In Hong Kong, toy retailer Toys R Us pulled some of the Australian toymaker's products from its shelves, while the Hong Kong government said it was testing "Bindeez" products in its laboratories to ascertain whether the suspect toys had breached toy safety or dangerous drugs laws.
Moose Enterprise said that, when the toy was eventually returned to shop shelves, the beads would be coated with a special product to try to stop children swallowing them.
"This is a foul-tasting ingredient which will ensure children do not in future eat multiple beads. All replacement beads and new shipments will include this ingredient," it said.