The first observation of the decay $kstarkstar$ is reported using 35invpb of data collected by LHCb in proton-proton collisions at a centre-of-mass energy of 7 TeV. A total of $49.8 pm 7.5$ $B^0_s rightarrow (K^+pi^-)(K^-pi^+)$ events are {observed within $pm 50 mevcc$ of the Bs mass and $746 mevcc < m_{Kpi}< 1046 mevcc$, mostly coming from a resonant $kstarkstar$ signal.} The branching fraction and the CP-averaged Kstarz longitudinal polarization fraction are measured to be {$BR(kstarkstar) = (2.81 pm 0.46 ({rm stat.}) pm 0.45 ({rm syst.}) pm 0.34, (f_s/f_d))times10^{-5}$} and $f_L = 0.31 pm 0.12 ({rm stat.}) pm 0.04 ({rm syst.})$.