The Commerce Commission said it would soon file charges in the District Court over the Roo Crew Take-Apart Vehicle toys, which had been sold at the retailer from March 2021.
The Warehouse had issued a voluntary recall for the product.
Commerce Commission principal compliance adviser Grant McIntosh said it was concerned about the risk the toys could pose to small children and was urging anyone who may have bought them to return them.
"Businesses must ensure that the products they supply comply with legal requirements and are safe for the intended user - particularly toys for small children where the consequences of unsafe toys can be dire."
Under the Fair Trading Act, toys designed, manufactured, labelled or marketed for use by children under three must comply with the product safety standard.
This meant they could not have parts that could come off during play, as this presented a choking hazard for young children.
"Businesses cannot avoid their responsibility under the Fair Trading Act by simply labelling toys for children over three if the toy is designed or marketed for use by younger children," McIntosh said.
In response, The Warehouse executive general manager merchandising Tania Benyon said it was "disappointed" by the Commerce Commission's decision to commence legal proceedings, "especially given our full cooperation since they raised this matter with us in 2023 and the fact that we immediately removed the item from sale as soon issues were raised".
"The Roo Crew Take Apart Vehicle, while compliant with all safety standards and clearly labelled and marketed for ages three and over, is no longer sold in our stores as a sign of how seriously we take product safety."
The Warehouse would be "taking advice on next steps and considering our legal options", Benyon said.
Any customers who still had the toy (84495580063 ROO CREW Take-Apart Vehicles Assortment) could return it to their local store for a full refund. No receipt or proof of purchase was needed, she added.
