Niamh and Cayden Maynard, aged five and two, died in the fire at their home in Buxton, Derbyshire, on Friday night after they became trapped upstairs.
Their mother, 23-year-old Fiona Adams, jumped to safety from a bedroom window on to a trampoline with her eight-month-old son Kiernan.
Yesterday, Derbyshire Police said a 17-year-old arrested in the early hours of yesterday morning in connection with the fire in Edale Way had been released and was no longer a suspect.
The police have decided no further action will be taken against him. Assistant Chief Constable Steve Cotterill said: "During the course of any investigation we make arrests when someone's conduct gives rise to suspicion as to their actions.
"After a thorough investigation, I am satisfied that this 17-year-old is not involved in the fire. As I have previously stated, the community of Fairfield have been very supportive to our investigation so far and I am extremely grateful for that and the way in which local people have responded to this tragedy.
"My plea is that this continues. The police investigation is still very much ongoing and the help and co-operation of the com-munity is pivotal to its success."
Emergency services were called to the blaze just before midnight on Friday night.
It is believed the children's father, James Maynard, was at work at the time. Ms Adams and her baby were rushed to hospital after jumping from the bedroom window, but the two children were trapped upstairs.
Police said both mother and baby were stable in hospitals in Manchester. Post-mortem examinations were due to take place on Niamh and Cayden today, but police said formal identification had yet to take place.
Investigations were continuing into the possible cause of the fire, which has been described as suspicious by police.
Mr Cotterill made a specific appeal to those in the area at the time of the blaze. He said:
"I'd urge anyone who may have photographs or video footage of the scene of the fire either prior to, during or after the incident to get in touch with us to help us build up a full picture of what has happened."