The privately run Little Ted’s child care centre in Plymouth, where she worked for the past three years, was closed as police carried out searches.
Officers are investigating whether Mrs George took photographs of any of the children at the nursery and are trying to identify a number of youngsters in the images.
Police sources said yesterday that the pornographic pictures were “at the top end of the scale”.
One parent said it was her “worst nightmare” and said she had contacted Ofsted two months ago after her child came home from nursery in a distressed state – but did not hear back.
Faye Goodman, 23, mother of two-year-old son Ronnie, said: “A couple of times after nursery he was shaking and said he didn’t like a particular member of staff. He said ‘I don’t like her, I don’t like her’.
“I tried to get him to explain but he is only two and he can’t express himself completely. I didn’t know what to do so I contacted Ofsted about the situation but I never heard back.
“It is disgusting. It is every parent’s worst nightmare.”
It is not Ofsted’s duty to investigate allegations, however officials there admit they would be expected to pass the letter on to detectives or contact the complainant and ask her to contact her local police station.
Devon police sources said they had not received any complaints about Mrs George in the past few months, and had acted on intelligence following a raid on the home of Colin Blanchard, 38, in Manchester.
It is believed that detectives found a disk allegedly linked to Mrs George, which was passed to police in Devon on Monday night.
It is suspected that Mrs George may have sent the images on a disk to Mr Blanchard, who emailed them to others.
Chf Supt Jim Webster, of Devon and Cornwall police, said: “We are taking the matter very seriously.
“It is difficult to identify exactly who is in the images at this stage.
“The starting point of the investigation was internet based. In an investigation of this nature there is often a chain of communication and passing on of images.
“We received information yesterday about the receipt of indecent images and searches are still on going. There is naturally great concern in the community. We will make sure parents and the wider community are kept informed.”
The nursery school, which has nine staff and 64 pupils aged from two to eleven, is located within the grounds of Laira Green Primary School which has 284 pupils.
Parents dropping children at the day care unit and school were given letters from senior police explaining a staff member has been arrested yesterday.
Chrissy Goodwin, who has two children aged 10 and six at the school, said it was “disturbing”.
The unit is managed by a board of trustees and is a not for profit enterprise and serves the Laira area of Plymouth.
It was visited by Ofsted inspectors in 2007 who said: “Protecting children from harm or neglect and helping them stay safe is satisfactory. Children are cared for in a mainly safe and secure environment.”
A spokesman for Greater Manchester Police said: “A 38-year-old Littleborough man has been charged with possessing indecent images.
“Colin Blanchard was charged with possessing and distributing indecent images. He was due before Trafford magistrates court on Tuesday 9 June 2009.
“The charges relate to images recovered from a computer, mobile phones and other items of software.
“Following our investigation information was passed to Devon and Cornwall police who have arrested a 39-year-old woman. For more information speak to Devon and Cornwall police.”
An Ofsted spokesperson said: “Ofsted was unaware of the recent allegations about a member of staff at Little Ted’s Nursery in Plymouth which we understand has led to its immediate closure.
“We have had one recent complaint relating to the nursery. This complaint was not of a level that would require police involvement and did not relate to the content of the allegations made public today “Ofsted is investigating this matter in line with our normal procedures and it would not be appropriate to comment further until the outcomes of that investigation are complete.”