The 13-year-old suffered life-threatening injuries in the attack in Havant, Hampshire, but is now "critical, but stable", police said.
The condition of the other victim, 12, remains "serious, but stable".
A 43-year-old man of no fixed address was arrested at the scene of the stabbings, near the junction of Southleigh Road and Eastleigh Road.
The man is currently in custody.
Officers were called to the area by a member of the public just before 15:00 BST on Friday.
The children, who are from the local area, were victims of an "isolated incident", Hampshire Constabulary said.
Officers are appealing for witnesses and said there would be patrols across the weekend.
One of two young boys stabbed in a daytime knife attack has made a slight recovery in hospital.