The woman, in her 30s, died from a single bullet to the chest after pointing what police thought was a shotgun at officers outside the shop. The firearm was later found to be an air rifle.
She was the first woman shot dead by police.
The drama began when the armed woman entered the First Mobile Vodafone Shop in Reyburn St in Whangarei's CBD, about 9am yesterday.
Several staff members fled through a rear door but the woman held a man hostage.
A witness later told The Dominion Post the woman was overheard to say one of the staff members "owes me money for drugs".
The woman opened the door of the shop at least twice and was challenged by police to put the gun down and surrender.
Finall she opened the shop door again and pointed her gun at a member of the armed offenders squad crouched behind a car.
He fired one shot hitting her in the chest.
Police tried to resuscitate her but she died at the scene and her body was latewr removed from the scene.
A post mortem was due to be held today.
Witnesses said the woman was on drugs.
One, who saw the woman shot and drop to the ground and not move again, told NZPA she was "pretty nuts".
Another witness said the dreadlocked woman appeared "crazed on P".
The male worker held hostage was not hurt.
Shop owner Brett Sawyers, 50, raised the alarm after he fled the store.
A area around the shop was cordoned off and police closed streets and told other people in nearby buildings to stay back from the windows.
Glenn Lambert was in his cafe across the road when he saw two people in the store.
"She made the hostage sit on chairs at the front in the reception area, but most of the staff had run out."
The woman walked out the front door waving the gun around.
"She was a tall girl and had long dreadlocks," Mr Lambert told The New Zealand Herald.
"She looked like a P-freak with a rifle."
From the street the woman's body could be seen just inside the door. She had blood on her sneakers and blood spatters could be seen on the shop front by the door.
Acting district commander Inspector Chris Scahill said all the Vodafone staff were shaken. The staff member who had remained inside was "very shaken up".
Police began a homicide investigation and the officer in charge of professional standards has been notified. The Independent Police Conduct Authority would also hold an investigation.
The woman was identified yesterday but her name has yet to be released.
A Vodafone spokesman said the first priority was the care of Vodafone staff in the store when the drama began.
`Our thoughts are with all involved and the staff of the Whangarei store in particular," the spokesman said.
Mr Scahill said the shooting was a "tragic incident for all that have been involved".
The policeman who shot the woman was "shaken up" and, like his colleagues, was receiving counselling.
