The incident took place in west Delhi's Moti Nagar house of the librarian, Anil Sharma, 40, around 2 p.m.
According to deputy commissioner of police Ranveer Singh, Reena Taneja, 44, wife of builder Manoj Taneja, entered the librarian's house and engaged in a heated argument with his wife, Sudesh, 36, over some issue.
"During the argument, Sudesh attacked Reena with a sharp-edged weapon that led to the latter's death. Later, Sudesh stabbed her own son Aarav, 3, daughter Komal, 17, and herself," Singh told IANS.
"Sudesh attacked her own son and daughter because she was afraid as to who would take care of them after her death," said the officer.
Singh said neighbours learnt about the stabbing incident around 2.40 p.m. when they heard Komal screaming for help in her balcony.
"The neighbours informed police as Komal was bleeding," said Singh.
By the time police arrived at the spot, the toddler and Reena had died.
"Sudesh and Komal were admitted to the All India Institute of Medical Sciences where they are battling for life," he said.
The officer confirmed that police came to know about the sequence of events from Sudesh who gave a statement before being hospitalised.
However, the police are still to ascertain the dispute between Sudesh and Reena that led to the stabbing spree.
"We have registered a case and probe is on to find the cause," added the officer.
The police said they found an anonymous suicide note written in blood that blames builder Manoj for the incident.
Talking to IANS, Anil said he was in office at the time of the incident.
"I reached hospital after getting information. My daughter Komal told me that Reena had first attacked her mother. When she tried to intervene, the woman also stabbed her," Anil told IANS.
Sharma is a librarian with The Pioneer newspaper here. His wife Sudesh is a nurse with Delhi government's Acharya Shree Bhikshu Government Hospital.