An Austrian woman was one of the dead, according to police, while the identity of the second victim, also a foreign woman, was still unclear.
A short circuit near the fuel tank may have been the cause, officials said, ruling out a bomb.
Indonesia has a poor maritime safety record and fatal accidents are common.
The boat was carrying at least 30 passengers, including many foreigners, and four crew, and was heading to the nearby island of Gili Trawangan.
There were also tourists from the UK, France, Italy, Portugal, Ireland and Spain on board, according to a passenger manifest.
The explosion on the Gili Cat 2 boat happened 200m (219 yards) out of Padang Bai port in eastern Bali, according to police.
"Based on the testimony [from passengers] and from what I saw on the scene, the explosion came from the fuel tank," local police chief Sugeng Sudarso said.
"Above it was a battery. Maybe there was a short circuit that affected the fuel tank?"
The explosion, he said, shattered the boat's rear windows and upended seating.
A spokesman for the British embassy in Jakarta said it was providing assistance to British nationals injured in the blast, AFP news agency reports.
Last year, dozens of tourists were injured when small explosions hit a ferry crossing between Bali and the neighbouring holiday island of Lombok. The explosions were thought to have come from the fuel tank of the ferry.
But Indonesia has also been targeted by Islamist militants. In January, gun and bomb attacks on the capital, Jakarta left four civilians and four attackers dead.
In Bali itself, 202 people - mostly foreigners - died in 2002 when two bombs ripped through an area popular with tourists.
An explosion on a tourist boat off the Indonesian island of Bali has killed two people and injured at least 14 others, police say.