"One of the two children transported by helicopter to Turin hospital didn't make it," the National Alpine Speleological Rescue Corps tweeted Sunday evening local time.
The other child remains in a critical condition, according to the rescue group.
Officials had earlier said both children survived with injuries.
A photograph of the crash site, posted by Italy's national fire brigade, shows first responders surrounding the mangled cable car near broken trees and severed cables. A spokesperson for the fire brigade said the death toll could rise.
Italian Prime Minister Mario Draghi expressed his sympathy to loved ones of the deceased in a statement Sunday.
"I learned with deep sorrow the news of the tragic accident of the Stresa-Mottarone cable car. I express the condolences on behalf of the whole government to the families of the victims, with a special thought for the children who were seriously injured and their families," the statement read.
The Prime Minister is receiving constant updates on the situation from the Minister of Sustainable Infrastructure and Mobility Enrico Giovannini and local authorities, it added.
European Council President Charles Michel offered his condolences in a post on Twitter, saying, "Europe is mourning with you." In a separate post, European Parliament President David Sassoli said that "we must get clarity immediately on the cause of this absurd tragedy."
By Barbie Latza Nadeau and Nicola Ruotolo, CNN. CNN's Niamh Kennedy contributed to this report.