This can be as challenging as low light sports actions.
I have used both PS cameras and D-SLRs for my kids, toughest age is probably pre-school toddlers, never stand still, moving randomly in all directions. When my older son started to walk/run, I have to get D-SLR to keep up with him. I'm not a pro photographer, but I probably spent more than an average dad on cameras to take my kids' photos.
If you want to easily capture all kinds of candid shots with young kids, then that will cost you quite a bit with a D-SLR, a general purpose f/2.8 zoom, a mid-range tele f/2.8 zoom, and an external bounce flash. I have this set up and it works most of the time. The problem is this set up is bulky and not always with me, so still need a PS camera.
I got the Canon G10 which is good, but the new G11 is even better. This does not work all the time but better than most other compacts, and can go everywhere I go, including under the water with an underwater housing.
Here is a tip for taking young kids photos. Outdoor usually is not a problem. For indoor shots, always try to get the kids to a brighter area to take the shot (closer to the window/light). Turn on as much light as possible. In lower light, it is better to use semi-auto mode or manual mode. With the G11, you can easily set to aperture priority, select the widest aperture if in low light condition, and then focus and snap the shot. If this does not work, then you can switch to shutter priority, set shutter speed to 1/125 (minimum speed needed to freeze slow actions, faster actions may need 1/250 or 1/500), then focus and snap the shot. If it is too dark, then select a higher ISO (yes it will have noise but it is better to get a sharp picture with some noise than a blurry photo). You can also do post-processing to brighten the photo, this will increase noise too.
If you tried everything and nothing works, then use the video mode or a camcorder.