Vic inquiry into abuse of state ward

Victoria's child welfare commissioner says he has opened an inquiry to examine the exploitation of children in state care.

"This is an inquiry that I began three weeks ago as a consequence of concerns that I have around the number of incidents of sexual assaults and also the fact that young people are being exploited," Commissioner for Children Bernie Geary said.

The inquiry follows News Limited and ABC reports that organised gangs of pedophiles are grooming and sexually exploiting children as young as 12 in out-of-home care, enticing them with money and drugs.

Police have set up a taskforce to investigate a gang in Dandenong suspected of preying on teens in care.

It has allegedly sexually abused girls in care in Dandenong, Shepparton and Melbourne's west.

"People might assault kids who are living in residential care because they are very vulnerable," Mr Geary told AAP on Wednesday.

"These insidious people, who prey on kids, pick up on their vulnerability."

Mr Geary said sexual exploitation occurred in an organised way and he feared children as young as 15 and 16 in state care were being targeted.

The Commissioner said the understaffed and underfunded system is struggling to adequately respond to the vulnerability of traumatised young people who enter the care of the state.

Victoria's Community Services Minister Mary Wooldridge also told the ABC on Wednesday that the state's child protection system needs fixing to protect children from pedophile gangs.

She said the exploitation of vulnerable children, particularly those in out-of-home care, had been happening for several years.

Ms Wooldridge said the department received 189 "category one" reports - involving sexual or indecent assault or rape against young people - in 2012/13.

All reports were investigated but not all were confirmed, she said.

Victoria Police says its sexual crimes squad and local investigation teams work closely with the Department of Human Services to investigate and prevent sexual assaults against children in protection.