Arabella, 13, of Oxford high school, was praised by the judges, authors Michael Rosen and Jacqueline Wilson. Mr Rosen, said he was "lulled into awe" by her description of ice-cold dips in the sea, cooking mackerel over the fire and making moated sandcastles in her story, Brendan's Cottage.
Rachel, 10, from Peterborough high school, also won praise for her lively story, John's World.
Eighteen other finalists joined Arabella and Rachel for a celebration at Shakespeare's Globe theatre in London yesterday. The two authors presented the writers, all key stage 2 and 3 pupils, with signed books and pound;200 each towards a writer's residency at their schools. All 20, accompanied by a teacher and a parent, also saw a staging of Romeo and Juliet.
More than 7,000 pupils entered the contest, organised by The TES with The National Association for the Teaching of English and sponsored by McDonald's. Judging of the early stages was organised country-wide by NATE.
Jacqueline Wilson and Michael Rosen chose four pieces from the final 20. The stories are all autobiographical and record a particular person, place or incident.
Ms Wilson, author of The Illustrated Mum and the Tracey Beaker books, said:
"They were an exceptionally interesting bunch of stories this year."
Mr Rosen, poet, storyteller and broadcaster, admired "the real sense of honesty in the entries". He said: "It was a sheer delight to remember that one of the most important things school can do is provide a space within which children can talk and write about things that matter to them.
"Why or how did we ever get to a point at which this idea could be devalued or ignored?"
The full list of finalists and the stories of the two winners and runners-up Jonathan Moore, 9, of Potley Hill, Yateley, Hampshire and Camilla Moser, 11, La Chat-aigneraie International School of Geneva, are published in Friday magazine.
All 20 stories are reprinted on www.tes.co.uk