Ziketan town in Qinghai province was put under collective quarantine Saturday when laboratory tests showed it had been struck by the highly virulent disease, the Qinghai health bureau said in a statement.
A 32-year-old herdsman had died from the plague, while 11 others had been diagnosed with it, according to the statement.
Late Sunday Xinhua, citing the local government, reported the dead man's 37-year-old neighbour had also died.
Ziketan, which is located in the Hainan Tibetan Autonomous Prefecture, had enough supplies to get by on its own for the time being, the health bureau statement said, giving no indication of when the quarantine would be lifted.
The health bureau urged people who had visited Ziketan on or after July 16 to seek immediate help if they developed coughing or fever.
An official at the Ziketan health bureau contacted by AFP Sunday declined to give further details.
Pneumonic plague spreads through the air, making it easier to contract than bubonic plague, which requires that a person is bitten by an infected flea.
It is also more lethal, with a fatality rate of up to 100 percent if left untreated, compared with 60 percent for bubonic plague.