The children's father discovered the bodies of his wife and children when he returned to the family home in the village of Emmering, west of Munich, in the early hours of Saturday morning.
Police sources say Hannes, six, and Moritz, four, were suffocated in their beds. Their mother was found hanged. The exact details of crime are still unknown, but police say the dead 38-year-old woman, known only as Catrin F, is the prime suspect.
Her motive for the killings has left locals in the quiet town of 6,400 inhabitants baffled. A polices spokesman said there weren't known to have been recent family quarrels and the family appeared to have had a happy home life.
The children's father, 45-year-old Karl F., is said to be in shock and is yet to be questioned by police. He is currently under the supervision of a crisis management team and in the care of relatives.
Karl F. will be questioned in the coming days. According to a police spokesman, authorities are keen to know where he was before arriving back at his home on Saturday morning.
It's the second family tragedy to strike the state of Bavaria this month. Last week a 44-year-old craftsman from Ostallgäu was found to have strangled his sons, aged four and ten. He then hanged himself on an industrial site near Kempten.
His wife, 37, and daughter, 16, were found safe at their family home shortly afterwards.