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FBI agents entered the bunker to rescue the child after fearing that he was in "imminent danger," said Steve Richardson, special agent in charge in Mobile.
Negotiations with the suspect, identified as 65-year-old Jimmy Lee Dykes, had deteriorated during the previous 24 hours, Richardson said during a televised news conference.
"Mr. Dykes was observed holding a gun," the FBI agent said.
The rescue of the boy came on the seventh day of a standoff that drew national media coverage and gripped a rural corner of southeast Alabama with dread.
The drama began when Dykes, a retired trucker and veteran of the war in Vietnam, seized the kindergarten student last Tuesday after boarding a school bus and killing its driver with four shots from a 9 mm handgun, local sheriff's department officials said.
Dykes fled with the child, identified only as Ethan, to a homemade bunker on the man's property down a dirt road.
The child was being treated on Monday at a local hospital, but was physically unharmed, Richardson said. The boy is due to celebrate his birthday on Wednesday and, by all accounts, was taken by Dykes at random.
It was not immediately clear how Dykes died.
A local law enforcement source said a stun or flash grenade was detonated as part of the operation to free the boy, but further details were not immediately released.
The hostage-taking came amid heightened concerns about gun violence and school safety across the United States after the December shooting deaths of 20 children and six adults at a Connecticut elementary school.
Law enforcement officials had offered few insights about Dykes and their negotiations with him ahead of the rescue just after 3 p.m. local time.
Earlier on Monday, Dale County Sheriff Wally Olson said the gunman had a "very complex" story to tell.
"Based on our discussion with Mr. Dykes, he feels like he has a story that's important to him, although it's very complex. And we try to make a safe environment for all for that," Olson said, without elaborating.
The sheriff's office previously had thanked Dykes for allowing them to deliver medication, coloring books and toys to the boy, who is said to suffer from Asperger's Syndrome and attention deficit-hyperactivity disorder.