A security firm had initially alerted them of an attack on a service station there.
“The criminals were exchanging gun fire and stoning the guards,” Lae metropolitan superintendent Anthony Wagambie Jnr said in a statement.
“Police on foot went to the location and were confronted by the gang, who engaged them in a shootout.
“Police shot three suspects. Two are in critical condition while one is confirmed dead and in the morgue,” said Wagambie Jnr.