The woman was shot dead by a member of the armed offenders squad following the drama at a First Mobile Vodafone shop in Reyburn Ave, Whangarei about 9am.
Eyewitnesses say the woman went out of the shop twice before reportedly pointing the air rifle at armed police, causing them to fire at her.
It was believed she was killed with a single shot.
Police have refused to reveal whether the air rifle was loaded.
A post mortem was expected to be carried out tomorrow on the woman, aged in her 30s, but her body remains on the street as police contact her next of kin.
Police Association spokesman Greg O'Connor flew to Whangarei as soon as he heard about the shooting to "support the troops".
Mr O'Connor told Newstalk ZB he wanted to be in Whangarei because of the vacuum which followed these types of shootings.
There was always speculation, because police were unable to provide too much information, which affected the officers and their families, he said.
"I just want to make sure it doesn't get out of control."
Acting District Commander Inspector Chris Scahill told media the shooting was tough for police to deal with.
"It's a tragedy for all those involved," he said this afternoon.
He described the shooting as an extreme event for everybody involved and that it had a significant impact on police staff.
About six people were reportedly inside the store when the woman entered the shop.
Whangarei Police spokeswoman Sarah Kennett said it was thought the woman was displaying some intimidation towards people at the scene.
Minutes after the woman entered the shop, the owner alerted police and the armed offenders squad arrived.
Police said the woman held a man hostage inside the shop and walked in and out of the shop.
When she pointed the air rifle at police she was shot.
Ms Kennett said this afternoon that the rifle had been recovered from the scene.
She said it was hoped the victim's name would be released tomorrow .
Cordons remained in place this afternoon on Reyburn St, between Lower Dent St, Herekino St, and the corner of Robert and Carruth Streets, as police did a scene examination.
The Independent Police Conduct Authority has sent two staff members to the scene to conduct their own investigation into the shooting.
Vodafone New Zealand said its first priority was the care of staff who were in the store at the time.
"We have arranged counselling and will provide whatever ongoing support is needed," external communications manager Paul Brislen said.
"Our thoughts are with all involved and the staff of the Whangarei store in particular. They acted calmly and responsibly during a tense situation and while they are obviously shaken and upset they are otherwise unharmed.
"We are working closely with the police to ensure full cooperation during their investigation of the incident."
Eyewitness Michelle West, 19, told NZPA the woman opened the door of the shop and a member of the police armed offenders squad shot her from behind a car across the road where he had taken cover.
She said the woman dropped to the floor after being hit and never moved.
Miss West, a paint colour consultant in a shop across the road, said the woman came out of the shop about an hour after the drama began and was "pretty nuts" just before she was shot.
An hour after the shooting the victim was still lying unmoving on the ground.
"It was pretty sickening considering I saw the whole thing," she said.
