Try these sites:

http://illustmaker.abi-station.com/index_en.shtml (Chinese and Japanese) harder to use but easier to save
http://www.reasonablyclever.com/mini/kidsafe.htm Lego blocks easier to use and but harder to save.
http://www.meez.com,
http://www.tektek.com, also
http://elggplans.wikispaces.com/avatars ,
http://www.weeworld.com
www.befunky.com
http://www.weblin.com/index.php?cmd=B4DA282A01&room=en2
Doppellme
Otaku avatar maker
My avatar editor
messdudes no login required
http://mashable.com/2008/06/12/mego/ May need to check the age entry on this one.
animated gifs
as avatars
Build yourself (Chris Betcher uses this with grade 3s) Other avatar sites to be found through Chris Betcher's delicious tag.
From a teachers mailing list comes the following suggestions
Doppel Me was the most popular.
Simpsonize Me version 1and version 2
Build Your Wild Self
DoppelMe (It seems you only need to register to access some of the options in each section.)
Otaku Avatar Maker
Voki (requires registration and over 13 to use it)
Avatar editor
For older students
imvu
Avatars in eLearning - alternatives to second life