Members of the public spotted the three children and a woman with stab wounds inside a vehicle on Waratah Road at Valley Heights shortly before 1pm on Sunday.
After finding one child dead, the witnesses rushed to help the survivors, delivering first aid while waiting for emergency services to arrive.
Paramedics treated all three at the scene before taking them by road to Westmead Hospital and Westmead Children's Hospital in critical condition.
Hours after the incident, NSW Police Superintendent John Nelson said the father of all three children had been notified, but not yet the wider family.
The father had been "going about (his) business" at work when he received the call from police, he said.
"You can imagine receiving that tragic news," Supt Nelson told reporters.
He said the woman had not previously come to the attention of police and that investigators were not currently looking for anyone further in relation to the incident.
She was thought to be aged in her 40s and the children all under five years old.
All three underwent surgery upon admission to hospital.
Supt Nelson praised the efforts of the "upstanding" members of the public who responded to the tragic scene.
"People are just going about a lovely Sunday afternoon and being confronted with this is traumatic and tragic for anybody," he said.
Responding officers would not be spared the hardship and would have access to available supports.
"Like any human being, it's a tragic circumstance to be exposed to," Supt Nelson said.
"They're highly professional officers, and they responded in such a professional way."
Homicide investigators and local police remained at the scene on Sunday afternoon, with a section of the road closed to traffic.
Supt Nelson said the weapon used and the circumstances surrounding the incident would form part of investigations.
Blue Mountains councillor Darren Rodrigo on Sunday described the news as "absolutely horrendous and tragic".
"Our deepest love and condolences to the immediate family and our prayers with all the children involved," he said.
"A massive thank you to the community members (who) intervened to provide medical assistance and to our first responders for their incredible support and courage during this time."
Anyone with information about the stabbing or who had footage of the attack was urged to contact police.
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