The deaths are the first on Bali, where the deadly H5N1 strain of the virus was found more than a year ago.
The 29-year-old woman from the northwest of the island, far from the major tourist centres, died on Sunday, while her daughter died on August 3, said Bayu Krisnamurti, head of Indonesia's national bird flu commission.
"Both people are positive, from (tests at) the Eikman Institute and the health ministry's lab," he told a press briefing.
In Indonesia, two tests must be returned positive before a human infection is confirmed.
A two-year-old girl, a neighbour of the victims, was admitted to hospital on Sunday and is also suspected of being infected, he said.
Joko, from the Bird Flu Information Centre in Jakarta, said that chickens had died in the victims' neighbourhood of bird flu recently.
Indonesia reported its first human bird flu case in July 2005 and has since confirmed 81 deaths, the highest number of any nation.
Scientists worry the bird flu virus could mutate into a form easily spread among humans, leading to a global pandemic with the potential to kill millions.
Infected poultry was first found on the northwest of Bali last year, when hundreds of birds were culled but no human infections were found.