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22 October 2011 Last updated at 21:09 GMT Eyewitness Peter Desaunois: "There was so much water, so much mud"
The pair, believed to be in their 70s, were hit by a torrent of water at a street market in the town of Finestrat on the Costa Blanca, said Interior Ministry official Jose Perez Grau.
Heavy rain inland caused the torrent to rush downhill into a dip where the market was being held, he said.
A witness said people had tried to save the couple, "but couldn't".
The Foreign Office confirmed the deaths and said it was offering assistance.
BBC correspondent Sarah Rainsford, in Madrid, said the couple were sitting outside a cafe-stall at the weekly market when they were hit by a wall of water up to a metre high.
One onlooker said the woman clung to a stall for safety, but was struck by another that was washed away by the water, our correspondent said.
Local media said bodies of the British couple, who have not yet been named, were found trapped under a trailer after the flood.
'Large wave'Peter Desaunois, from Finestrat witnessed the elderly couple being swept away.
He said: "The water came down the hill in a big wave. It was so powerful it broke the stones away from the wall and then the whole wall fell and was carried by the water down the hill. So much water came down.
"At that very moment an elderly couple who were at the market, near the beach got swept away. There was a big panic, everyone tried to help them but couldn't.
"About five to eight minutes later four ambulances arrived and the fire brigade. Other people got hurt too. It all happened in just a second. It rained so hard."
One eyewitness told Reuters TV: "Everything filled up with water.
"There was a lot of plastic accumulated next to a car and when we went to remove it we realised there were two people underneath it."
Another said: "A large wave came along and swept them away down here among the iron debris, clothes and market debris."
Council fineGovernment official Jose Perez Grau told the Associated Press news agency that it had been raining heavily inland for about 25 minutes before the incident, which happened at about midday on Friday.
Stallholders and visitors had been caught by surprise when the flooding hit because it had not been raining in the town itself, he added.
Local media said the water came gushing through a dried-up ravine and into the market place, wrecking cars and stalls.
Another two people were taken to hospital, according to local media, and a 90-year-old was missing for a time but was later found unharmed in a nearby street.
Last October, the town's council was fined around 83,000 euros by the local hydrographic authority for asphalting the ravine bed without permission. The authority says the area was first paved in 2004.
In its ruling, the Hydrographic Confederation said the council had the "obligation to abstain from using the ravine for a municipal market".
A Finestrat council spokesman said it had appealed the ruling. The council argued the paving was done by a private company that had been managing the market at the time and that too much time had passed since the supposed offence for a punishment to be issued. The result of the appeal is still pending.
Town hall spokesman Juan Francisco Perez said there had been a market in the ravine "all his life" and the area had been paved for many years. "It's like a street," he said. "So if it's been that way for years, and the environment ministry paid no attention, why did they find the problem now?"
Mr Perez said flooding was a common problem in all streets in the area and that there was nothing specific about the ravine. But he said that on days where there was an official flood alert, stall holders were not allowed to pitch their stalls for the market
But source at the Hydrographic Confederation - who did not want to be named - told BBC correspondent Sarah Rainsford the authority rejected the council's arguments against its ruling, saying: "Did it need these two people to die, for them to understand?"
One local trader described the tragedy as "predictable".
Sarah Rainsford said there were signs on the walls warning of the danger of flooding when it rained.
A Foreign Office spokesman said: "We are aware of the death of two British nationals in Finestrat, Spain.
"We are providing consular assistance to the family."
The authorities in Finestrat have declared two days of official mourning for the couple, who regional newspaper Diario de Informacion said had been on holiday in the resort of Benidorm, about seven miles east of the town.
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