About half a million children and young people gamble every week, a Gambling Commission report is expected to show.
The regulator has warned that children as young as 11 are using so-called skin betting websites, which let players gamble with virtual items as currency.
The items won – usually modified guns or knives within a video game known as a skin – can often be sold and turned back in to real money.
The Gambling Commission is releasing its annual survey on Tuesday.
It is estimated that half of the UK online population – more than 30 million people – play video games.
The Gambling Commission said it had identified third party websites that enabled players to gamble their skins on casino or slot machine type games and then these could later be be sold and turned into real-world money.
It said cracking down on the industry was a top priority.
'Struggle buying food'
Aberystwyth University student Ryan Archer's love of gaming spiralled into gambling when he was 15 and he became involved in skin betting.
Four years later he has lost more than £2,000.
"I'd get my student loan, some people spend it on expensive clothes, I spend it on gambling virtual items," he said.
"There have been points where I could struggle to buy food, because this takes priority."
Ryan wanted to build an inventory of skins, but when he could not afford the price tag attached to some of them he began gambling on unlicensed websites to try to raise money.
He said: "It's hard to ask your parents for £1,000 to buy a knife on CSGO (the multiplayer first-person shooter game Counter Strike: Global Offensive), it's a lot easier to ask for a tenner and then try and turn that into £1,000."
In CSGO, players can exchange real money for the chance to obtain a modified weapon known as a skin and a number of gambling websites have been built around the game.
"You wouldn't see an 11-year-old go into a betting shop, but you can with this, there's nothing to stop you," Ryan said.
What is skin betting?
Skins are collectable, virtual items in video games that change the appearance of a weapons – for example, turning a pistol into a golden gun.
Sometimes skins can be earned within a game, but they can also be bought with real money.
Some games also let players trade and sell skins, with rarer examples attracting high prices.
A number of websites let players gamble with their skins for the chance to win more valuable ones.
Since skins won on such a website could theoretically be sold and turned back into real-world money, critics say betting with skins is unlicensed gambling.
Sarah Harrison, chief executive of the Gambling Commission, said: "Because of these unlicensed skin betting sites, the safeguards that exist are not being applied and we're seeing examples of really young people, 11 and 12-year-olds, who are getting involved in skin betting, not realising that it's gambling.
"At one level they are running up bills perhaps on their parents' Paypal account or credit card, but the wider effect is the introduction and normalisation of this kind of gambling among children and young people."
Earlier this year, the Gambling Commission for the first time prosecuted people for running an unlicensed gambling website connected to a video game.
Craig Douglas, a prominent gamer known as Nepenthez, and his business partner Dylan Rigby, were fined £91,000 ($112,000) and £164,000 respectively after admitting offences under the UK's Gambling Act.
The men ran a website called FUT Galaxy that was connected to the Fifa video game and let gamers gamble virtual currency.
'Huge emerging issue'
Ms Harrison said the regulator was prepared to take criminal action, but said the "huge issue" also required help from parents, game platform providers and payment providers.
Some games providers have put more safeguards in place, but many of the sites are based abroad.
Vicky Shotbolt, from the group Parentzone said: "It's a huge emerging issue that's getting bigger and bigger, but parents aren't even thinking about it.
"When we talk to people about skin gambling, we normally get a look of complete confusion."
She called on regulators to take more action over the issue.
The Office for National Statistics will publish the research, carried out by the Gambling Commission.
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