The freak accident happened at Chester-le-Street, close to the Durham County Cricket Club, about 420 kilometres north of London.
Television footage showed the 2,500 square metre artwork, about the size of half a football pitch, ripping free from securing ropes and tipping vertically into the air.
Many of those injured were inside the structure, which consisted of inflated rooms connected by tunnels.
Durham police said a 38-year-old woman and a 68-year-old woman were killed. A three-year-old girl was in a serious condition suffering severe crush injuries and 11 other people, both children and adults, were also injured.
The artist who created the sculpture is believed to have witnessed the accident.
A woman companion of the artist, Maurice Agis, said he had been at Chester-le-Street when the accident happened and was now distraught and too upset to comment.
"He's very distressed. We were all there, he was there. He's given 10 years of happiness to people and then this happens - he's very sad," she said.
Eyewitness Mark Spooner told BBC Radio he heard three "snaps" as the ties holding the structure broke.
"As you heard them snap the wind just got underneath the belly of it and it lifted right up. It flicked right over. We thought it was going to come over and land on us.
"At the time you're just thinking, `There are people inside that. It must have blown 20 or 30 metres across the park and then it caught a pole and a lot of trees.
"About 40 men came from out of the park and they ran over and we all just started ripping it up with our hands.
"I remember sticking my head through and shouting, `Get out, get out'. If it had gone any more it would have been down into the river," said Mr Spooner.
It is believed 30 people may have been in the inflatable at the time, police said.
The structure finally came to rest after it collided with a post supporting a CCTV camera and crashed to the ground.
The five-metre-high structure was described on a local council website as a "monumental piece of temporary public art", and has appeared at venues across the world.