The boat, equipped with an outboard engine, began taking on water shortly after heading out into the lake Wednesday evening and sank in about 15 feet of water, police said.
The report said 10 people, including six children, were in the boat, which was designed to carry fewer than half that many passengers.
Immediately after the incident, witnesses gave varying reports on the number of people in the boat, perhaps confused by rescuers who had gone into the water from shore, authorities said.
Police identified the dead as Karlton Parker, 10, and Carnisha Banks, 11.
The boat went down 50 to 100 yards from shore in Lake Robco near the Tennessee-Mississippi border, authorities said.
Witnesses said the 11-year-old girl was underwater for about a half-hour before she was found on the bottom of the lake and pulled up by a firefighter.
Nine people were taken to hospitals because of the incident, including the other children who were in the boat. The youngsters, ages 8 to 14, were treated at Le Bonheur Children's Medical Center and later sent home, the Memphis Fire Department said.
Firefighter Ryan Jones said he was swimming in the lake looking for survivors while another rescuer in a boat used a long pole to probe the bottom.
"He felt like he grabbed something. I swam down, felt around and realized I had a girl," Jones said. "We got her up and got her in the boat."
Neighbor Leo Brown said he heard screams from a few doors down.
"I realized that people were in trouble. I saw a girl and she was holding a baby," said Brown, 54, who stripped off his pants and jumped in the water to help. "I couldn't think to do anything but go in."
Witness Claire Christian said that she had been spending the holiday at a residence on the lake with family and friends of the victims.
"They were just on the ride and it just happened so quick," Christian said.
It was not immediately clear how those involved in the incident were related.