God is love, but punishes evil
It is important to understand the love is not something that God does--it is something that God is (1 John 4:16). God is loving toward all He has made (Psalm 145) and is, indeed, incredibly merciful. He even delights in mercy and forgiveness.
However, He punishes evil as well, and this is a good thing. Yet, His purpose is to bring all to repentance and then to the forgiveness He is anxious to give them in His great love and mercy.
Regarding jealous, there is righteous jealousy and unrighteous jealousy. A man is righteously jealous for the affections of his wife, as is a wife to her husband. Each one has a unique righteous claim to the affections of the other. There is also unrighteous jealousy when we are jealous for things that are not rightfully ours. A mother can unrighteously jealous of her son's commitment after her son gets married. His commitment is primarily to his wife then, and the mother comes second.
God has a righteous jealousy for worship, as He is the only God and Creator.
We have to be careful about the word "children" here. I am my father's second child, but I am in no sense of the word a child. Children don't have specks of gray in their hair.
God is not saying here that He delights in abusing small infants just because their great grandfather sinned. It does follow, however, that if people continue in the sins of their great grandparents--sacrificing their infant children to idols, worshiping false gods, etc.--God will punish them for doing so, just as He did their forefathers.
The whole history of Israel, summarized nicely in Psalm 78, tells of a people who continually broke this commandment and worshiped false gods. However, God's punishment continually brought them to repentance, at which time God forgave and suspended His punishment.
So, in God's love and mercy, He punished Israel and brought them back to repentance, then forgave them over and over again.