A man and his wife who heard the crash and called 111 said they heard a loud bang and came out of their home, which overlooks the river, to hear "loud moaning".
"They were in real trouble," said the man, who did not want to be named.
A massive search-and-rescue operation including a helicopter and pilot with night vision goggles searched unsuccessfully last night for the men.
Senior Sergeant John Fookes, of Queenstown, said a private jet-boat carrying three men on a fishing trip and a jet ski carrying a man and a woman collided on a wide bend in the river at 7.30pm.
Two of the men from the boat could not be located. The third was taken to Lakes District Hospital with minor injuries.
It was understood the men were not wearing lifejackets.
The jet ski passengers were treated at the scene before being taken by ambulance to Lakes District Hospital.
They were later taken by helicopter to Dunedin Hospital with serious injuries.
The river, from the Kawarau River Bridge at Frankton, was last night closed to all but commercial uses until further notice.
The Boyd Rd resident who heard the crash said the loud noise startled him and his wife.
"I heard a commotion going on, a lot of words and yelling."
He called Queenstown harbourmaster Marty Black at 7.37pm while his wife called the emergency services.
Firefighters reported debris from the crash was scattered kilometres down the river, as far as Morven Ferry Rd, at Arrow Junction, past Lake Hayes.
Snr Sgt Fookes said the jet-boat was significantly damaged.
The jet ski was left resting among reeds further up the river.
Last night, a helicopter with Mr Black on board was using night vision to scan the river for the missing people.
Commercial jet-boats, including staff from the Kawarau Jet, police, fire, the coastguard and search-and-rescue volunteers had earlier scoured the river for the missing men.
Two divers also searched the river.
The police dive squad from Wellington is expected to arrive in Queenstown this morning to continue the search.
It is the third tragedy in as many months involving jet-boats in the Queenstown area.
Paul Woods (29), a doctor from the United Kingdom, was killed when his jet-boat flipped on the Matukituki River on Boxing Day.
Two others were hurt.
In September, the Kawarau Jet flipped while carrying 22 Chinese passengers after apparently hitting a sandbar where the Shotover and Kawarau Rivers meet.
One woman was killed and another eight injured.
