Australian clothing retailer Cotton On Kids has been fined AUD1m (US$1.05m) for selling highly flammable children's nightwear which was labelled "low fire danger".

The penalties imposed by the Federal Court come after the garments were sold by the discount retailer between September and December 2010.

"By supplying around 2,500 unsafe children's nightdresses and pyjamas across Australia, Cotton On Kids Pty Ltd and Cotton On Clothing Pty Ltd breached the Australian mandatory standard for children's nightwear," ACCC deputy chair Delia Rickard said.

"The nightwear was so flammable that they should not have been supplied in Australia at all. To compound this, the highly flammable nightwear was misrepresented by being labelled 'low fire danger'."

The penalty reflects the fact the garments were intended for infants and children.

"Children can suffer serious burns when the nightwear they're wearing catches fire, so it's important that suppliers take the necessary precautions to ensure their products are safe and compliant with Australian laws," Rickard added.