Hillcrest Primary School was holding an end-of-year event on Thursday when a wind gust caught the jumping castle around 10am.
Tasmania Police Commander Debbie Williams confirmed two children had died.
"Several children fell from the jumping castle. It appears they may have fallen from a height of approximately 10 metres," she 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."
Tasmania Police initially said a "wind event" caused the jumping castle to lift into the air.
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.
The school 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.
Tasmanian Premier Peter Gutwein has 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 told reporters.
