The children, aged one and five, were found by emergency services in Cabramatta, in Sydney's southwest, following reports of a crash about 3.15pm on Wednesday.
A number of witnesses tried to rescue the children but were unsuccessful, Acting Superintendent Timothy Calman said.
"The community involved here this afternoon was, I can only say, phenomenal," he told reporters.
"We've had a number of motorists that actually stopped and collectively have moved the vehicle onto its side, tipped the car over in order to get one of the children from underneath the vehicle, and other bystanders have assisted with CPR."
Paramedics treated the children at the scene and they were taken to hospital in a critical condition but they died, police said.
The children's 33-year-old mother was treated for minor injuries at the scene.
A 56-year-old man who was driving the car was uninjured and taken to hospital for mandatory testing.
NSW Police's crash investigation team is looking into how the incident happened.
In a separate incident in West Melbourne on Wednesday afternoon, a girl died in a four-car crash.
Emergency services attended the smash about 4.30pm and police are investigating.
A male driver and a second child in the same car as the female who died were taken to hospital in a critical condition.
Two other passengers from the car - a woman and a child - were also taken to hospital, but with non-life-threatening injuries.
Four other people from the three other cars were taken to hospital, none in a critical condition.
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