Hillcrest Primary School was holding an end-of-year event on Thursday when a wind gust caught the jumping castle about 10am.
Tasmania Police initially confirmed one child had died, before reporting a second death in the early afternoon.
"Several children fell from the jumping castle. It appears they may have fallen from a height of approximately 10 metres," Commander Debbie Williams told reporters at the scene in Devonport.
"A number of the children have been taken to hospital and some are in a critical condition.
"This is a very tragic event and our thoughts are with the families and the wider school community and also our first responders.
"This has been a very distressing and confronting scene."
Several rescue helicopters were used to transport the children after police units and multiple ambulance crews rushed to the scene.
Police are expected to provide further information on Thursday afternoon and have indicated counselling will be available to families and the community.
The school announced on Facebook it was closing for the remainder of Thursday and asked parents to urgently collect their children.
Hillcrest Primary was holding a 'Big Day In' celebration to mark the end of the school year.
Members of the public have been told to avoid the area.
Bob Smith, who lives near the school, told The Mercury newspaper he saw kids on the ground.
"There was one really strong gust of wind on what is a beautiful calm day," he said.
"At first we thought it might have been an emergency services training exercise then the reality of what was happening kicked in."
Tasmanian Premier Peter Gutwein passed on his thoughts to the community.
"My thoughts are obviously with ... the parents of the children that have been injured and with the emergency services," he said.
Prime Minister Scott Morrison described the accident as unthinkably heartbreaking.
"Young children on a fun day out, together with their families and it turns to such horrific tragedy. At this time of year, it just breaks your heart," he told reporters on the NSW Central Coast.
