The wife had left for her mother's house with the two daughters after a quarrel over the drinking habit of her husband, 35-year-old Rajan, police said.
Irked over this, Rajan went to his mother-in-law's house and strangulated his daughters, leading to bleeding injuries and death, police said.
He packed the bodies in a bag and wanted to dump it in the forest, they said.
The locals, who opened the bag, saw the bodies and informed police who seized them and sent them for post-mortem at the Gudalur Government Hospital.
Police are on the look out for Rajan, who is reportedly hiding in the forests, they said.
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