Authorities say a group traveling from out of state approached the Elmo character for a photo just before 7 p.m.
During the photo op, Elmo allegedly grabbed the buttocks of a 14-year-old girl.
The teen alerted her caretakers, who then alerted police.
The suspect, identified as 54-year-old Inocente Andrade-Pacheco, was arrested and charged with forcible touching and acting in a manner injurious to a child.
Aldrada-Pacheco denied the allegation through his lawyer, and he was released without bail despite prosecutors asking for $7,500 bail during his arraignment.
The behavior of Times Square's costumed characters became an issue several years ago, when police fielded scores of complaints about aggressive solicitations for tips, forced touching, assaults and grand larceny.
The city passed a 2016 law restricting the street performers to designated areas on Times Square's pedestrian plaza, but some believe that has done little to alleviate the issue.
According to the Times Square Alliance, 47 percent of New Yorkers have had unpleasant interactions with the costumed characters in Times Square.
Alliance President Tom Tompkins says too many characters are pushing the boundaries and that the law meant to keep the characters in the blue-marked areas isn't doing the trick.
"You've got a handful of these folks that are really really aggressive," he said. "And all the other ones, to get any business, have to chase then down too."
WATCH: Times Square Alliance holds briefing on alleged incident
A man named Les often shows up as Batman, and he says he's one of the good ones.
"No touching, no touching," he said. "I've done this since 2011. It's simple. Don't touch...The characters are mostly good. You work (at a) post office, anywhere, you get some sort of person, not good, whatever, same thing here."
* More Manhattan news
* Send us a news tip
* Download the abc7NY app for breaking news alerts
* Follow us on YouTube