While the UK Toy Retailers Association says Cayla "offers no special risk" and "there is no reason for alarm", EU Commissioner Vera Jourova said: "I'm anxious about the impact of connected dolls on children's privacy and safety".
Manufacturer Genesis Toys has not yet commented on the German warning.
Vivid GmbH said it was taking the allegations about My Friend Cayla "very seriously" and would challenge the sale ban in court.
Experts have warned that the problem has not been fixed.
Researchers say hackers are able to access the doll's unsecured Bluetooth connection from up to 33 feet away and "through several walls" to listen to and talk to any children playing with it. University of Saarland student Stefan Hessel said "Access to the doll is completely unsecured", and that "there is no password to protect the connection". For example, if a child asks the doll "what is a little horse called?" the doll can reply "it's called a foal".
The My Friend Cayla doll remains for sale in the US, including via Amazon.
A vulnerability in Cayla's software was first revealed in January 2015.
In addition to the data protection concerns, a hack allowing strangers to speak directly to children via the My Friend Cayla doll has been shown to be possible.
Complaints have been filed by U.S. and European Union consumer groups.
Blimey, MyFriendCayla is now considered an ILLEGAL transmitting device! A breach of that law can result in a jail term of up to two years, according to German media reports.
The heart of the problem, Homann says, is that Cayla looks like an everyday doll and gives no notice that it collects and transmits everything it hears - in this case, to a voice-recognition company in the US whose other customers include intelligence agencies. Wonder if that applies to all Bluetooth audio devices with no PIN?
"It doesn't matter what that object is - it could be an ashtray or fire alarm", he explained.
Norwegian authorities did not ban the toy like their German counterparts, but it's known that Germany has much stricter privacy laws compared to many countries.
Surveillance is a sensitive issue in Germany where East Germany's Stasi secret police and the Nazi-era Gestapo kept a close watch on the population.
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