The Seamstress. A giant snake with a porcelain doll's head that grafts the dead body of 2 onto her tail and uses it to hypnotize 8 into submission, before sewing him inside her body and dragging 7 away. She boasts numerous appendages just designed for chopping up and sewing up innocent stitchpunk skin. Also, to silence 8, she sews his mouth shut. Yeah...
That "chopping up innocent stitchpunk skin" echoes the original short, wherein one shot clearly shows part of 5's fabric sewn into the body of the original Beast.
Just watching the Winged Beast's construction is pure horror. You see the Fabrication Machine grabbing random bits of scrap, fabric, and human bones, and pull them together off screen. Then a beaked shadow rises up, its eyes light up and it starts screaming.
Due to that scene, "Over The Rainbow" has become this for most people who have seen the movie. Simply typing the lyrics will result in horror from a fan. It also acts as a Tear Jerker for many, but it's mostly this.
Anytime someone's soul gets sucked out, but perhaps 5's was the worst, thanks to all his panicked screaming and shouting "No!" over and over again. And the hole burnt in his eyepatch afterwards... brr.
More so because he knew by that point what was going to happen, and could only struggle helplessly against the claws of the machine holding him, until...
2's was worse, because you didn't know if he was dead or alive, and just had that Pink Floyd The Wall mask look to him.
7 got harpooned for god's sake, and didn't appear to feel any pain, which implies that the stitchpunks can't feel anything, good or bad.
Being a puppet doll means dismemberment won't kill you. Think about it. Also, the soul-stealer.
The whole concept, really; even the cute things are horrifying if you think about them for more than a few seconds. For example, the bird skull that 7 wears for armour is all well and good until you consider that there probably aren't any birds left alive anywhere.
The Cat Beast has a skull strapped onto its head that can give anyone the willies.
Watching 6 get his soul sucked out and his dead body being pitched into a dark, seemingly endless chasm below... *gulp*
Seeing a mother and her baby as withered corpses.
The talisman that sucks out your soul (or at least a part of it), causing you to become nothing more than a body.
When 7 and 9 are escaping the factory, there's this very brief shot of a spider-machine running over 8's dead body.