The armed man shot by police in Motueka, near Nelson, had his sister at his side when he was critically injured.
Police said they are looking for a second man in relation to the incident, which happened in Wharepapa Grove, shortly after 4pm.
The shot man was named as Ford William Hurinui, 27, who was wanted by police for breach of parole.
He underwent surgery in Nelson Hospital on Thursday night before being flown to Wellington Hospital. A hospital official confimed Hurinui was in critical condition.
The sister of the shot man was dragged from his side by armed officers, her partner said.
"My partner went in to help him up, to see if he was alright or still alive but the Armed Offenders Squad went and ragdolled her off."
Police were alerted to a wanted vehicle in the Motueka area, which was located about 3:30pm.
The vehicle failed to stop and there was a short pursuit through residential streets.
A man got out of the vehicle and pointed a gun at police.
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Officers negotiated with the man in an attempt to resolve the sitution, but were unsuccessful.
The man received immediate medical attention before being flown to hospital.
A full investigation into the incident has been launched and the Independent Police Conduct Authority (IPCA) notified.
At a media conference in Wellington, Tasman District Commander Superintendent Karyn Malthus said the armed man did not fire on police but was shot because he presented a gun at police.
"When an armed offender presents a firearm at police it is a very dangerous act. One of the tactical options we have is communication. We ask the offender to surrender. However, an offender who does present a firearm at police does run the risk of getting shot," Malthus said.
"No police officer goes to work wanting this sort of thing to happen. However, the reality is we work in a dynamic and at times high risk environment.
"That sometimes requires us [police] to deploy firearms in order to keep the members of the public and our staff safe."
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There was a large police presence in the Pah St area and cordons were in place in Talbot and Grey streets, which caused a disturbance for some parents trying to pick up children from Parklands School.
Ryan Sim said on Facebook that he saw a gunman on Pah St and police officers with their guns drawn.
"The whole town stood still, traffic was backing up due to people wanting to know what was going on," he said.
"All I saw was a man with a gun and officers pointing their rifles back at him."
It is the third time in the past nine days that police have been confronted by armed offenders in New Zealand, Police Association president Greg O'Connor said.
"On each of these three occasions, a police officer could very easily have lost their life.
"It is not enough for governments to talk about reductions in reported crime when serious violence continues to be a major problem in New Zealand society and is boiling over into incidents like these."
Today staff attempted to stop a vehicle driven by a man wanted for breach of parole in Motueka. He failed to stop. A short pursuit followed.