I have a four-year-old and sort of grapple with this one, myself. He hasn't played any games yet. His imagination is so vivid (as was mine when I was little), and he is still getting down what his own body can do. It's not that he can't do two things at once (learning physical manipulation as well as operating in digital environments) but I worry that the digital might supersede the physical.
I also think about how games have changed. I can't remember the exact age I was when I started gaming, but it was back on the GameBoy and NES days, playing Mario and the like. Even though there was violence and killing, it didn't really register that way. Games today, by comparison, are so detailed and life-like in their appearance. Would it hurt their imagination, to have the entire scene and world rendered for them? And what does it do to them, to witness things like that? I don't worry about the sexualization in games quite as much - sometimes it's shocking to re-listen as an adult to pop songs I grew up with and you realize just how sexual the lyrics actually are, which leads me to think that pre-pubescent kids aren't really tuned into it - but violence is a concern.
I think the first game with life-like renderings that I played was a Wing Commander game. I was about nine years old. There was some incompatibility when I played it on my father's computer (or maybe it was just too advanced for me) and I couldn't do much aside from launching from the mothership, but after trying to fly around for a bit my wingmen would make distressed communications and then die. Couldn't do anything about it, not sure why it happened, but invariably I'd return to base and there was a funeral sequence. I think I sat through two of those in total before getting bored of the game. Went off the computer and about ten minutes later I just broke down in tears, clueless as to why. My parents assumed it was the game (likely correctly) and went to return it to the store, and I didn't protest that.
I would like to get my children into gaming at some point, but I'm not sure on the timing. I'll definitely be watching the age ratings (which didn't exist for the earliest part of my childhood), and perhaps try for multiplayer, so that we can process what's going on together. I wouldn't mind digging back to the old NES and SNES games, either.