One woman was killed and some two dozen others were injured, at least four critically.
Police say it started when one of the horses rubbed its head against the other, removing that horse's bridle.
Amateur video captures the moment the two horses bolted from the parade route, running over spectators in the process.
"They were mowing people over," said witness Jeff Junk. "Little kids were getting mowed over. They were probably going 40 miles per hour."
Two people were ejected from the wagon as the horses galloped out of control for several blocks.
"There was probably no way of stopping them without great risk to the person jumping in," said Kristen Jaster, who also witnessed the incident.
Several of the injured are children who were in the street collecting candy that had been thrown from the parade.
Mary Martino pulled 2-year-old Raina out of harm's way just in time.
"I just grabbed her and I whipped her around onto the sidewalk," Martino said. "Everyone was in panic mode, like oh, my goodness there are horses charging."
Emergency crews that were in the parade and watching the parade rushed to help.
"It was just chaos," Junk said. "Everyone was running. Kids were laying here and older people laying down."
The injuries include broken bones, collapsed lungs and head injuries.
Helicopters airlifted the injured to local hospitals.
"It's the first time we've ever had anything like this happen," Bellevue Fire Chief Chris Roling said. "You hear about it on TV and now it happens here."
"I just couldn't believe it because I grew up here and we've always had horses in the parade and never had anything like this happen before," said witness Sarah Maxwell.
"Never seen nothing like it, never want to see anything like that again," Junk said. "It was bad."
The stampede came to an end when the horses crashed into a parade float and collapsed. They had run about six blocks.