The tragedy occurred at the Banksia Road Public School when the car collided with a wooden classroom building not long after lessons started.
"The vehicle continued inside the building and tragically we have had a number of young children injured as a result," said New South Wales Assistant Commissioner Stewart Smith.
"As a result of that collision, five kids were urgently conveyed to Westmead Hospital. Tragically, two of those kids, male children, are deceased."
The children who died were aged eight. A further 18 children were treated at the scene for minor injuries.
The woman driver, 52, was being questioned and undergoing alcohol and drug testing.
NSW Ambulance Superintendent Stephanie Radnidge said medics arrived to "a scene of carnage".
"There were a number of distressed and overwhelmed children and teachers at the scene of a horrible accident," she said.
"There was obviously pandemonium."
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