The bomb went off as people gathered at the Church of Assumption in Dhoibighat area, a suburb in Kathmandu Valley.
Both the victims, including a 14-year-old girl, were Indian nationals, police said.
Both were rushed to hospital in critical condition and died while undergoing treatment, the police said.
Several other injured people were reported to be in serious condition, according to officials.
Witnesses said the bomb was in a woman’s handbag that was placed inside the church as some 150 people gathered for morning prayers.
There were no immediate claims of responsibility. However, media reports said leaflets of a group calling itself the National Defence Army was found near the church.
The group has been demanding Hinduism be declared the official state religion of Nepal. It has used such tactics in the past.
Police said they had heightened security across the capital city following the blast.
Hinduism was the official religion of Nepal until 2006, when the country declared itself a secular nation following the overthrow of King Gyanendra’s government.
The blast came just hours ahead of the vote in parliament to choose a new prime minister to replace caretaker Prime Minister Pushpa Kamal Dahal. (dpa)