An investigation is underway after a man was shot dead by police in the NSW town of Warners Bay, police say.

Officers were called to a post office on Postmans Lane at about 3:15pm on Wednesday, responding to reports a man in the area had been armed with a knife.

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The man was confronted by officers and then shot dead at the scene “after a police firearm was discharged”, according to a police statement.

It is alleged the man who died was a former worker at the post office.

A critical incident team are now looking into the circumstances surrounding the incident. It will be overseen by the Professional Standards Command.

Local Cheryl Taylor told the Newcastle Herald she was going to the post office but then warned off.

“A woman said to me don’t go over there, there’s a man with a knife,” she said.

“The knife was a really big knife…there was another man there saying don’t do it mate.

“I heard two shots fired and that was all I heard.

“Since then I’ve heard a lot of stories…but that’s all I know.”

Warners Bay is trending high! Top Trends every hour only @ http://t.co/1BJ7dLJePw pic.twitter.com/lIuOzfLPoE

— TrendsinAustralia (@TrendsinOZ) September 9, 2015

BREAKING: – A former postal worker shot by police outside the Warners Bay post office this afternoon has died

— Natalie Forrest (@nat_forrest) September 9, 2015