The store, which sells thousands of the collectors' edition bears around the world every year, admitted that the higher than normal level of formaldehyde - used in embalming fluid - could cause skin problems.
If the chemical is inhaled in high concentration, it can also trigger headaches, a burning sensation in the throat and difficulty breathing.
In fact, the most dangerous part is that it has been identified as a cause of throat and nasal cancer.
Toddlers with sensitive skin or asthma are particularly at risk.
Harrods has sent a letter to people who have already bought the bears earlier this month.
The company, owned by Mohamed al Fayed, recalled the 8-in Michael bear and the 13-in Elliott bear.
Before the problem was spotted by trading standards officers, only 800 of the soft toys had been sold.
"All Harrods' toys are rigorously tested. It is regrettable that, in this isolated case, the products were not manufactured to our high standards," the Mirror quoted a Harrods spokesman, as saying.
"This is a precautionary but necessary recall and a replacement or refund will be offered," he added.