Select a children's song or a child-friendly dance song. The "Kidz Bop" line of CDs provides a wide array of child-friendly versions of hit radio singles (see References below).
Do not allow yourself to get self-conscious. The more easygoing you are, the more your dancing will entertain the children. Even if you feel like you look silly dancing, the children will be enjoying your efforts.
Feel free to get goofy with your dancing. It's not about performing perfect dance maneuvers that would dazzle in a competition, as more lighthearted dances, like "the lawn mower," in which you pretend to be pull-starting a mower, get far better reactions.
Teach the children a popular group dance that you know. Some great options are the Electric Slide or the Macarena.
Pretend to teach the children a dance by deciding on a name, then teaching the children a series of fun moves, and acting as if this is a popular dance that everybody knew when you were their age. Combine simple "real world" dance moves with silly dances like the sprinkler, in which one turns their body in the fashion of a lawn sprinkler.