There is provided a system and method for playsets using tracked objects and corresponding virtual worlds. There is provided an object for use with a physical environment and connectable to a virtual world corresponding to the physical environment, the object including a processor and a plurality of sensors including a position sensor. The processor is configured to establish a first connection with the virtual world, wherein the virtual world contains a virtual object corresponding to the object, determine a position of the object using the position sensor, and send the position of the object using the first connection. There is also provided a physical environment having similar capabilities as the object.