Step 1: Understanding the Concept:
The Present Continuous tense is used for actions happening at the exact moment of speaking.
Step 2: Detailed Explanation:
The exclamation "Look!" is a signal that an action is currently occurring right now in front of the speaker.
To describe an ongoing current action, we use the Present Continuous form: is/am/are + Verb+ing.
Since "children" is a plural noun, we use "are playing".
Step 3: Final Answer:
The correct form is "are playing". Therefore, option (C) is correct.