Detective Superintendent Martyn Lloyd Evans, leading the murder hunt, said he believed the killer set the house at Clydach, near Swansea, alight in an attempt to destroy evidence of the attack.
Doris Dawson, 80, her daughter Amanda Power, 34, and Mrs Power's two daughters Katie, 10, and Emily, eight, died despite attempts by fire officers to revive them.
"It is my belief that these people have been attacked first," Det Supt Lloyd Evans said. "The fire is merely a way to conceal what has taken place. All four victims have suffered injuries. Whoever has done this would be bloodstained and after the crime they have gone home somewhere."
A neighbour saw smoke coming from the house in Kelvin Road at around 4.20am yesterday, but was unable to enter. He called the fire brigade, said Det Supt Lloyd Evans.
"They forced their way into the house and found a fire in the ground- floor rooms. They went upstairs using breathing apparatus and a search then revealed the four bodies. There is a clear sign that an attack has taken place in the house and there are a number of seats of fire," he said.
Mrs Power, a divorcee, and her two children were last seen at 12.30am when they returned to the house owned by her mother, Doris, after babysitting for a friend.
Det Supt Lloyd Evans said: "Amanda was described by family and friends as being a devoted mother of two.
"Three generations of the same family have been murdered and I would appeal for anyone with information to come forward. It is a serious, dreadful murder of a family who have been brutally attacked and it is important we get to the bottom of this as soon as possible."
Mrs Power's former husband was told of the tragedy while he was at work, and has been helping officers investigate her lifestyle, police said.
But senior officers admit they have no idea about the motive for such an attack, and are keeping an open mind.
Victoria Jones, 19, a neighbour, described the family as "lovely, lovely" people. "The mother was a really happy person who lived for her children. I cannot imagine that anyone could do this," she said.
Lisa Sullivan, 15, who babysat for the two young girls, said: "I saw them on Saturday afternoon and they seemed very, very happy. It is hard to believe I will never see them again."
Fifty officers have been drafted in to the murder hunt, and are being aided by of forensic scientists and scenes-of-crimes experts.