The Therapeutic Goods Administration (TGA) said in a statement it had recently become aware the product contained the substance, which is often used as a solvent, to help other substances dissolve.
While the product contains only a small amount, however the TGA advised that if Infants Friend were to be taken in high doses, it could expose children to unsafe levels of chloroform.
Short term and intermittent use was not expected to be harmful.
"The TGA investigation concluded that the safety of Infants' Friend oral liquid was not acceptable due to the potential for infants to be exposed to intakes of chloroform that exceed a safe level. This conclusion took into consideration that the product label did not specify a maximum number of doses or duration of use, which may lead to prolonged use at high doses," the statement read.
"At high doses and/or following long-term use, chloroform is known to cause damage to the liver, kidneys and nervous system. The established safe level of intake for chloroform is based on studies in animals and include wide safety margins."
As the liquid has been available for sale in Australia before 1990, it is considered a 'grandfathered' medicine, meaning it had not been previously evaluated for safety, quality or effectiveness by the TGA.
The TGA has advised it is considering further regulatory action to ensure any future Infants Friend products meet these standards.
While mostly used for colic, the product can also be used to relieve discomfort from teething and constipation and can be used from one month of age.
Anyone who has purchases the liquid is advised to discontinue use and to return any remaining product to the place of purchase for a refund.
Parents who have questions or concerns regarding the product can contact the Infants' Friend customer service line on 1800 981 403, or talk to your family doctor.
Any parents whp suspects their child has had an adverse reaction to the product should report it to the TGA.