The man was a passenger in a car that was stopped by police near the small township of Otane, south of Hastings just before midnight last night.
He was known to police and was the subject of a police operation in central Hawke's Bay last evening, where the Hawke's Bay armed offenders squad searched several properties in the seaside village of Porangahau looking for him.
Later in the evening police received information the man was in Otane and police were patrolling the area looking for him.
Eastern District police spokeswoman Kris McGehan said police had set up a checkpoint stopping all vehicles in Otane last night, and intercepted the vehicle the offender was a passenger in.
"They had been looking for him for a few days so they were stopping any vehicles in the area at the time,'' she said.
Eastern District Commander Superintendent Sam Hoyle said said there were two officers in the car when the man approached and he told one of the officers he had a gun and was going to kill him.
As he advanced on the officer he was concealing something in his sweatshirt pocket.
Mr Hoyle said the officer backed off from the offender, warning him several times to show his hands and that police were armed. The officer fired a single shot at him, hitting him in the torso.
As the police officer struggled to restrain him, the man told them he had a grenade and was going to "blow them all up'', Mr Hoyle said.
The man was given first aid at the scene by the police officers and was taken to Hawke's Bay Regional Hospital by ambulance. He was in a critical condition this morning.
Nearby residents told Hawke's Bay Today they did not hear or see anything during the stand-off, but had seen police passing through yesterday afternoon.
Road blocks remained in place at the corner of SH2 and Higginson Street as police continued their investigations, and detours would be in place until later today.
Ms McGehan said the driver of the vehicle was not involved in the stand-off.
"He wasn't involved in the incident at all, he was very co-operative with police and won't be facing any charges,'' she said.
The Independent Police Complaints Authority has been advised of the shooting and a criminal investigation will be run by senior police officers from outside the Eastern District.
The officers involved in the incident were now off duty.
- NZ HERALD ONLINE
