Malaysian Chief Gen. Zulkifeli Zin said soldiers were trailing "two terrorists" into a home when they were shot at and returned fire, the Philippine Daily Inquirer said.
One soldier and a third child were also injured and had been taken to the hospital, The (Malaysia) Star said.
The dead were not identified but Zin confirmed the bodies of Filipinos had been transported to the morgue.
The Sulu "army" is a band of about 200 fighters loyal to a historic sultan who once ruled much of the area. The soldiers returned to the island of Borneo to stake their claim as the sultan's heirs.
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