Symantec found an application called the 'Android Market Security Tool' that is a repackaged version of the legitimate update by the same name that removed the DroidDream malware from infected devices.
The fake security tool sends SMSes to a command-and-control server, Mario Ballano from Symantec said in a blog.
The company is still analysing the code, which it found on a third-party application market targeted at Chinese users.
"What is shocking is that the threat's code seems to be based on a project hosted on Google Code and licenced under the Apache License," Ballano wrote.
The fake security tool shows that hackers are taking an interest in Android, which is the fastest growing mobile OS according to analyst Gartner. More than 67 million Android devices were sold last year.
Google took the rare step last week of forcing the 'Android Market Security Tool March 2011' onto devices to remove DroidDream. Typically, phone manufacturers and operators are responsible for issuing updates to devices, not Google.
The move came after more than 50 applications within Google's official Android Market were found to be contaminated with DroidDream, which stole information such as the phone's International Mobile Equipment Identity (IMEI) number and the SIM card's International Mobile Subscriber Identity (IMSI) number, and sent it to a server located in California.
DroidDream could also download other code to a person's mobile phone. It used two exploits called 'exploid' and 'rageagainstthecage' to infect the phone. Google has patched the vulnerabilities in Android versions above 2.2.2, but many Android users do not have the latest version of the software.
The 'Android Market Security Tool March 2011' does not actually fix the vulnerability that allowed DroidDream to infect phones but merely removes the malware, said Timothy Armstrong, a junior malware analyst with Kaspersky Lab, in a blog post.
The intervention by Google also underscores problems with how Android is updated, he wrote.
"Due to the nature of Android in its current state, it's very difficult and expensive to push security updates as you would on a desktop operating system like Linux or Windows," Armstrong wrote. "Unlike iPhone, which installs patches via iTunes, or Windows Mobile which uses ActiveSync, Android works almost entirely via over-the-air communication."
Google officials contacted in London did not have an immediate comment.
See also: Android set to crush Nokia/Microsoft