Both children were under the age of five, ABC News cited the Madison County Emergency Management Agency as saying.
The tornado, which hit the area on Saturday afternoon, destroyed 25 to 30 houses in the area north of Winterset, according to the report.
The Iowa-based National Weather Service Des Moines tweeted that its survey teams have already been dispatched in the area "to thoroughly investigate the damage and further assess a potential rating."
ABC news also cited local officials as saying that the Red Cross has set up an emergency centre in the city's New Bridge Church.
Iowa Governor Kim Reynolds has declared disaster in Madison County.