The children`s two young siblings and mother were also seriously hurt in the explosion at Maloora, on the outskirts of Indian Kashmir`s summer capital Srinagar, a police spokesman said.
"The children found a grenade from a site where militants and security forces had fought a fierce gunbattle late last year," the spokesman said, adding that they took the device home.
"It exploded once they started fiddling with it," he said.
A separatist insurgency has raged in Indian Kashmir, a Muslim-majority state, for 20 years, and at least 114 people died in street protests last summer in pitched battles with security forces.
After two wars over the area, Kashmir is administered in part by India and Pakistan, but claimed in full by both. (*)