Over 100 students were present in the basement of the private school in densely-populated locality of Mughalpura when the incident took place last evening.
The school administration had arranged a farewell party for some students.
"A group of students were presenting a skit when smoke emitting from a power generator entered the basement. Some 32 students, half of them were girls, fell unconscious while the remaining managed to leave the place," Hammad Hasan, a school employee said.
"Thank god there was no stampede," he said.
Lahore police spokesman Niyab Haider said that the police had registered a case against the school administration and arrested its owner and principal.
"The school administration is responsible for the incident," he said.