In a briefing document obtained by AFP, Israel's internal security agency, Shin Bet, said the men had confessed to the murder of five members of the Fogel family at the northern West Bank settlement of Itamar and staged a reconstruction of the slaying.
The Israeli military confirmed the arrests, with Colonel Nimrod Aloni, commander of the Shomron Brigade in the northern West Bank telling a briefing: "We can say that the murderers are in our hands."
Shin Bet and the Israeli military said the two suspects are from the West Bank village of Awarta, which lies near Itamar and has been the central focus of the investigation into the murders.
Israeli troops imposed a curfew on the village after the attack and have arrested dozens of its residents in recent weeks, prompting the local council head to accuse Israel of a policy of "collective punishment."
The grisly March 11 stabbing at Itamar claimed the lives of a couple and three of their children, one just a few months old.
The attack sent Israeli police on high alert and sparked fears of attempted revenge attacks by West Bank settlers.