The incident took place last night (Monday) when a number of children from one of the city's schools were taking part in a group chat via social media.
It was reported that a man who was not known to them joined the chat and went on to expose himself before performing a sex act.
In a letter, parents at one school were told that it was not the first incident involving the live.ly video streaming platform to be reported.
It said Leeds safeguarding team had received at least one other call in the past week voicing similar concerns about the app, which is linked to the musical.ly platform.
The matter has been referred to West Yorkshire Police for further investigation.
Parents were urged to check whether their children had downloaded the app to their phones and ensure it was deleted.
The letter explained: "Whilst the app is only supposed to access contacts on the user's phone, it appears that quite quickly, friends of friends of friends are able to join the group chat whom your child does not know at all. It is therefore an unsafe app for children to use, as it risks either an incident such as happened yesterday, or opportunities for your child to be groomed online and therefore at risk of sexual exploitation."
It went on to advise parents to talk to their children about the importance of telling them if someone's online behaviour made them scared or uncomfortable.
Anyone with concerns about a specific incident should report it to police via 101.