"This is a dark day for the army and for the airforce," Swiss airforce chief Aldo Schellenberg told reporters near the crash site, according to the ATS news agency.
The Swiss military voiced pessimism about the fate of the two crew members on the F/A-18 fighter jet, which crashed at around 2pm in the Lopper area, near the village of Alpnachstad in the central canton of Obwalden.
"Pictures from the site lead us to fear the worst," army chief André Blattmann told the press conference.
The defence department said in a statement that "the cause of the crash, as well as what happened to the two crew members remains unclear for the time being."
In another statement, the department said "there is little hope that the crew could have survived."
An investigation has been launched into why the F/A-18D Hornet, which had taken off from Meiringen in the canton of Bern, had come down, the department said.
According to a witness account on Blick.ch, two fighter jets had been flying in parallel when one crashed into a cliff overlooking the Alpnach lake.
"I was standing on my balcony, when two F/A-18s flew by very low," the witness was quoted as saying.
"Then there was a bang — a jet had slammed into a rock wall."
MeteoSwiss, the national weather office, said conditions in the area were poor at the time of the crash, with heavy cloud cover, strong winds at higher altitudes, and perhaps some light rain.
Switzerland bought 34 single- and double-seated F/A-18s in 1996, built by American company McDonnell Douglas.
One of the double-seaters crashed in Crans-Montana in the south of the country in 1998, killing both pilots.
The Swiss airforce had its deadliest accident in 1982, when a helicopter crashed in the northeastern Saentis region, killing the pilot and six soldiers.
The F/A-18 Hornet is 17 metres long and 12 metres across.
The Swiss model weighs around 17 tonnes and can carry up to seven tonnes of equipment.
According to the Swiss military, the plane is capable of reaching supersonic speed in seconds and has an "exemplary" manoeuvrability, making it well-suited for flights through Switzerland's narrow valleys.
Wednesday's accident came as the country is preparing to buy 22 Gripen JAS-39 fighters, made by Sweden's Saab.
Both houses of the Swiss parliament have approved the deal, which carries a price tag of 3.13 billion francs ($3.35 billion).
But it remains highly controversial in Switzerland, with concerns raised over the spending cuts it will entail in other areas and discussions over whether the neutral country should have a fighter jet fleet at all.
A poll published last month indicated that 63 percent of Swiss oppose the deal, which does not bode well for a likely popular vote to make the final decision, as part of Switzerland's direct democratic system.