The Australian Competition and Consumer Commission says Heinz falsely presents Shredz as a healthy food with the same nutritional value of fresh fruit and vegetables, and alleges the company could be misleading parents.
Heinz promotes Shredz as being "99 per cent fruit and veg" and a way to introduce children aged 1 to 3 years old to healthy eating.
"If you look at something saying it's 99 per cent fruit and veg, which it prominently displayed - most people would think that's fairly low in sugar," ACCC chairman Rod Sims said.
"An apple is about 10 per cent sugar [but] these products are between 60 and 70 per cent sugar."
Shredz packaging claims the products encourages toddlers to "independently discover the delicious taste of nutritious food" and "inspire a love of nutritious food that lasts a lifetime."
But the ACCC alleges Shredz were likely to have the opposite effect.
"We allege that far from encouraging young children to develop a taste in nutritious food, which is what parents want, they're likely to in fact have the child become accustomed to a preference for extremely sweet things," Mr Sims said.
The ACCC's action, filed in the Federal Court, follows a complaint by the Obesity Policy Coalition about products mostly made from fruit juice concentrates and pastes, which are much higher in sugar than whole fruit and vegetables.
Heinz decided to pull the products from sale late in the ACCC's investigation, pending an enforcement action, the ACCC said.
Heinz strenuously denies the allegations and will defend them, a spokeswoman said.
"Heinz takes labelling of products very seriously and complies with all Australian labelling and food laws," she said.
Shredz are mostly made from fruit concentrates and pastes, and one variety contains 12 grams of sugar per serve.
OPB executive director Jane Martin said that would make up almost an entire day's worth of added sugar for a two-year-old, based on World Health Organisation recommendations.
"Manufacturers are turning to what sounds like it might be healthy by using sugar from fruit, but we know the WHO considers fruit concentrates and pastes as added sugar," she said.
"These sorts of high-sugar products aren't an appropriate food for kids. It's much better to give them whole, unprocessed foods."
Shredz come in three varieties: peach, apples and veg, berries apple and veg, and strawberry and apple with chia seeds. They have been for sale in major Australian supermarkets since August 2013.
The ACCC is seeking to have the products withdrawn from sale and have Heinz fined and ordered to publish a correction.
Heinz has been contacted for comment.