Little Kaysha Richardson was playing with her two friends on the inflatable activity centre in the back garden of her home when she became trapped.
The toddler was playfully bouncing when she somehow got her head lodged in the inflatable basketball ring attached to the castle.
Fortunately, her mum Kelly was sitting in the garden on their home in Windsor Drive, South Hetton, and rushed to help.
As the youngster struggled to get free the plastic material twisted around her throat and she was unable to breathe.
Kelly, 21, frantically tried to free her daughter as she became limp.
"It was just getting tighter all the time," said Kelly.
"Then all of a sudden Kaysha's arms went limp. It was cutting off her air supply.
"She was dangling as if she had been hung. It was horrible."
As her friend Nathan Brown held Kaysha up to relieve the pressure on her neck, Kelly managed to slip a finger under the hoop and yank it over the child's head.
Kaysha was left shocked but otherwise unhurt by her ordeal, but Kelly said it could have been much worse.
"I had been supervising her, but if I had had to nip to answer the phone when it happened she could have died," she said.
Kelly got the toy's details from the Argos website, which said it was suitable "for ages three years and over."
Now she wants Argos to take the £19.99 toy she bought at the Peterlee store off the shelves of its 600-plus UK shops, including two in Sunderland.
"They said just bring it back and you will get a refund. But that's not enough," Kelly said.
"But somebody else's child might not be as lucky as Kaysha."
An Argos spokeswoman told the Echo: "We are committed to the safety of our customers at all times, and we ensure all the products we sell are tested to comply with the relevant UK and EU safety standards."
The spokeswoman offered her sympathy to Kelly and her daughter, but added: "At this stage we have no plans to withdraw the item from sale as it has a good safety record.
"However we will continue to monitor it and take action if we feel it's necessary."
Kelly contacted Durham County Council's Trading Standards, which confirmed it is looking into the matter.
However, she fears any investigations could take months.
"During that time it's still being sold to parents when it should be off the shelves."