In sanctioning the company, government officials specifically pointed to Google's marketing communications with brands such as Mattel, the maker of Barbie, which described YouTube as "today's leader in reaching children age 6-11 against top TV channels".
The companies allegedly collected information of children viewing videos on YouTube by tracking users of channels that are directed at kids.
YouTube has reached a settlement with the Federal Trade Commission and NY attorney general for allegedly violating the Children's Online Privacy Protection Act (COPPA), according to CNBC. Yet when it came to complying with the law protecting children's privacy, he said, "the company refused to acknowledge that portions of its platform were clearly directed to kids".
The move, which is being seen as a major change in how kids are targeted on the internet, comes as YouTube's parent Google agreed a $170m (€154m) fine with U.S. regulators over having improperly collected personal data on children.
Masthead credit: Child watching YouTube by Thais Ceneviva.
The FTC Chairman and the other two Republican commissioners voted to approve the settlement, while the Democrats opposed the measure. Similar to the agency's fine with Facebook, Google settlement has "no individual accountability, insufficient remedies to address the company's financial incentives, and a fine that still allows the company to profit from its lawbreaking".
As part of the settlement, YouTube also agreed to work to train its software to detect content that is kid-oriented using a type of artificial intelligence known as machine learning, which learns to recognize regularly occurring patterns and identify them.
Investigators at the FTC and in NY agreed, finding that Google's own content rating systems had identified certain YouTube channels as directed toward children.
Ms Wojcicki also said that the company will put in place measures to stop YouTube creators getting around the new rules.
Some lawmakers and children's advocacy groups, however, complained that the settlement terms aren't strong enough to rein in a company whose parent, Alphabet, made a profit of $30.7 billion a year ago on revenue of $136.8 billion, mostly from targeted ads.
The company will also spend more to promote its kids app and establish a $100 million fund, disbursed over three years, "dedicated to the creation of thoughtful, original children's content", Chief Executive Officer Susan Wojcicki wrote in a blog posting.
YouTube has its own service for children, YouTube Kids.
In addition to the monetary fine, the proposed settlement requires the company to refrain from violating the law in the future and to notify channel owners about their obligations to get consent from parents before collecting information on children. Previously, the company had pledged to deactivate comments on all videos featuring young children and some with older children.
The FTC's fine against YouTube now needs to be approved by a federal court in Washington.
Google will pay an additional $34 million to NY state to resolve similar allegations brought by the state's attorney general.
"The $136 million penalty is by far the largest amount the FTC has ever obtained in a COPPA case since Congress enacted the law in 1998", the FTC said in the press release.
But while the company was boasting of its popularity with children in public, in private it promised that COPPA was not a concern, the FTC alleges.