Police were called to the Reykjavik home of the unidentified suspect, and proceeded to fire tear gas canisters into his residence in an effort to resolve the matter.
Officers then enter the building flanked by special forces, prompting the 59-year-old man to resume his attack.
Two members of the special forces team sustained gunshot wounds before the man was finally brought down.
The suspect was later pronounced dead at the hospital; his motive remains unclear.
"Police regret this incident and would like to extend their condolences to the family of the man," Icelandic police chief Haraldur Johannessen said in a statement to the press.
Though Iceland has the 15th highest rate of guns per capita (30.3 firearms per 100 people), it also has one of the lowest rates of gun-related deaths.
Only four people died of gun-related deaths in 2009, compared with 31,347 gun-related deaths in the US that same year.
An International Business Times report attributed the lack of gun violence to Iceland's strict gun control laws.
GunPolicy.org also notes that police officers in Iceland "do not carry a firearm" while on routine patrol.