Davide Belgrano, 20 and Giuseppe Nicola Lasponara, 17, both students at the Olivetti institute in Matera, were killed after jumping from the balloons basket following a collision with some electrical cables, Il Messaggero reported.
The exact circumstances of the incident are still unclear, but an early hypothesis is that the balloon suddenly lost altitude and struck some high tension electrical cables.
The impact caused a fire to break out in the basket, sending the balloon spinning out of control.
It is thought that the two young men panicked and decided to leap to safety – but were both killed in the fall. There bodies were found a hundred meters away from each other in a farmer's field.
The balloon finally came to rest near a ruin on the side of a hill 500 meters away. Inside the basket the balloon's 72-year-old German pilot Hans Rolf Freidreich - an expert balloonist with years of experience - was found with only minor injuries.
Police are now investigating the pilot's role in the incident and have opened a culpable homicide investigation.
Following the tragic incident, the organizers of the balloon festival immediately cancelled this year's event, while Raffaello de Ruggieri, mayor of Matera, which will be European Capital of Culture in 2019, declared a national day of mourning.