We consider the modulational instability of nonlinearly interacting two-dimensional waves in deep water, which are described by a pair of two-dimensional coupled nonlinear Schrödinger equations. We derive a nonlinear dispersion relation. The latter is numerically analyzed to obtain the regions and the associated growth rates of the modulational instability. Furthermore, we follow the long term evolution of the latter by means of computer simulations of the governing nonlinear equations and demonstrate the formation of localized coherent wave envelopes. Our results should be useful for understanding the formation and nonlinear propagation characteristics of large-amplitude freak waves in deep water.