The explosion took place in Kharal Maldiyalan village, Bagh District, some 130 kilometres away from Muzaffarabad.
Bagh police confirmed seven-year-old Moeed and his five-year-old sister Shabana were killed after a ball-like shell they were playing with exploded.
"A six-year-old boy and his nine-year-old sister were killed in the blast while another sister aged 13 and their mother were injured," Hasan Wazir Afridi, a local police official, told AFP.
"The blast occurred when the young boy discovered an object resembling a ball in the street and took it home to play with his sisters," he said.
“They found the toy bomb under the bushes of the field near their house,” he added.
Afridi said it was unclear exactly what the device was or how it came to be in the village, which lies some distance from the de facto border with India.
A senior police official in the region, Riaz Mughal also confirmed the event.
The mother of the deceased and two other siblings also received injuries.
The injured people were rushed to Bagh hospital for treatment.
Police confirmed that they had lodged a first investigation report (FIR) and are investigating the matter.
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