This chapter explores key ethical issues in virtual reality (VR) and virtual worlds, with particular attention to the role of artificial intelligence (AI). VR technologies raise a range of ethical concerns, including privacy risks from the collection and analysis of sensitive data, threats to autonomy through behavioural manipulation, the potential for addiction and overuse, challenges around identity and self-representation, virtual harassment, and digital inequality. Many of these concerns are intensified, or directly enabled, by the application of AI. Following a brief overview of general ethical concerns in VR and the growing role of AI, this paper examines three domains in which AI integration in VR and virtual worlds raises distinct ethical challenges. The first concerns the AI-driven analysis of immersive behavioural data and its implications for privacy. The capture and processing of biometric, spatial, vocal, and emotional information enable personalisation but also create unprecedented opportunities for surveillance, profiling, and persuasive targeting. The second is adaptive environments and AI-driven avatars and their capacity for deception and manipulation. Adaptive systems use AI to embed influence directly into the structure of virtual settings, whereas avatars, whether relational bots, deepfakes, or proxies, can simulate empathy, impersonate trusted figures, and exploit attachment, threatening both autonomy and trust. The third is AI-driven content and rule enforcement and its potential for bias and discrimination. AI moderation may apply rules unfairly, while generative content can displace human creators and raise questions regarding inclusivity and accountability. Together, these developments show how AI intensifies ethical challenges in VR by embedding surveillance, deception, manipulation, and bias into immersive experiences. The paper concludes by emphasising the need for safeguards and governance to ensure the responsible design and deployment of VR and virtual worlds powered by AI.