The balcony at the Coyote Ugly club close to the athletes' village was a mangled wreck after it gave way and plummeted around five metres (16 feet) onto people below, sending hundreds of terrified clubbers running to the exit screaming.
Eight athletes including an Olympic gold medallist - US water polo player Kaleigh Gilchrist, who won at the Rio Games - were caught up in the tragedy.
"An internal balcony collapsed at a club in Gwangju, killing two," said Song Gi-ju, a detective with the Gwangju Metropolitan Police Agency.
"We have a total of 16 injured and among them 10 are foreigners. Of the 10, eight are athletes participating in the championships."
Song said the two dead were locals and not involved in the swimming championships, adding that police were investigating the possibility the balcony may have been illegally constructed.
The owner of the club - which was packed with more than 300 people as the balcony crumbled - will be investigated on charges of accidental homicide, police added.
The eight injured athletes include three Americans, two New Zealanders, one Dutch, one Brazilian and one Italian.
"A structure collapsed all of a sudden with people standing on it. Screams filled the area with broken parts flying all over," said a 32-year-old who was injured in the collapse, according to South Korea's Kukmin Ilbo newspaper.
"The site of the collapse was at the centre of the club where customers were most heavily located," said the party-goer, surnamed Kim.
A 38-year-old and a 27-year-old were rushed to hospital in grave condition but both died from their injuries, according to local media.
American swim star Caeleb Dressel expressed sympathy after completing a hat-trick of gold medals later on Saturday.
"I found out about it this morning," he said. "It's absolutely tragic - when I found out I was absolutely devastated. I hope they get to the bottom of it."
The world championships organising committee said most of the athletes were treated for minor injuries and have returned to their accommodation.
USA Water Polo said Gilchrist suffered a deep left leg laceration and underwent surgery Saturday at a Gwangju hospital.
Fellow US water polo players Paige Hauschild and Johnny Hooper were given stitches for an arm and hand injury respectively, it said.
"This is an awful tragedy," said Christopher Ramsey, CEO of USA Water Polo.
"Players from our men's and women's teams were celebrating the women's world championship victory when the collapse occurred. Our hearts go out to the victims of the crash and their families."
Ramsey added that all the American water polo players were "safe".
The Australian water polo team were also present but escaped without injury.
The New Zealand men's captain told Radio Sport: "We were just dancing and then the next minute we dropped five or six metres and everyone started rushing out of the club after that.
"We, I guess, fell on top of the heads of other people that were beneath us."
Swimming's world body FINA said it would "activate all measures to ensure health care and assistance is provided whenever necessary".
"FINA deeply regrets the situation and sends its best wishes to any victims of this accident," it added.
The world championships end on Sunday.