The F-16i aircraft was 31 miles off the coast of the Gaza Strip when the engine failed, The Jerusalem Post reported.
"A technical fault caused the engine to switch off," said a senior air force source, whose name was not reported.
The pilot and navigator "both ejected and parachuted. They spent around an hour in the sea in close proximity to one another, before being rescued by helicopter by the 669 Airborne Rescue and Evacuation Unit," the source added.
Medical crews checked the two men before airlifting them to a hospital, the Post said.
"Both are in good condition," the source said.
Israel Air Force chief Maj. Gen. Amir Eshel said all F-16i and F-15i training flights would be grounded until an investigation into the cause of the crash could be completed.
"These engines have tens of thousands of flight hours," the air force source said. "We've experienced midair failures in the past."