A number of "suspicious devices" have been found in the aftermath of the shooting where hundreds of people had gathered for the Chanukah by the Sea event to celebrate the start of the Hannukah Jewish festival on Sunday.
A massive police and ambulance response is under way after authorities responded to reports of shooters firing at a crowd gathered beside the beach about 6.40pm.
One of the gunmen is in police custody while the other was killed.
Police say they are working to disarm what they have described as an improvised explosive device.
"A number of suspicious items located in the vicinity are being examined by specialist officers and an exclusion zone is in place," NSW Police said in a statement at 9pm.
Multiple videos posted to social media show two gunmen standing on a footbridge connecting Campbell Parade to the Bondi Pavilion, firing shots into a crowd.
The men could be seen firing guns as people screamed and sprinted for cover.
A number of people could be seen lying injured and unmoving on grass at North Bondi.
Others were loaded into ambulances on stretchers while onlookers attempted to provide support.
Separate footage showed officers standing guard over a hunting rifle on the ground with an exclusion zone in place.
NSW Police confirmed two people had been taken into custody shortly before 8pm.
"Two people are in police custody at Bondi Beach; however, the police operation is ongoing and we continue to urge people to avoid the area," the force said in a statement.
Police are advising the public to avoid the scene, but confirmed the shooters had been "neutralised" and there was no ongoing active threat to the public.
People on the ground have reported panic, confusion and disbelief as chaos continued to unfold with emergency services on the scene.
Co-chief of the Executive Council of the Australian Jewry Alex Ryvchin described the incident as "our worst fear realised".
"It's a family event, a beautiful event every year," he told Sky News.
"If this is what we think it is, it is our worst fear realised … if we were targeted it's something of a scale none of us could ever imagine."
Unverified footage on social media shows a man running up on one of the gunmen and grabbing his weapon.
The video shows the bystander sneaking up behind the shooter before wrestling the firearm from his grip and pointing it at him.
Daniel, who is visiting Australia from Brazil, said he saw the two shooters on the bridge before about five police cars arrived.
He and a friend hid while the shots were fired and then they ran.
"A lot of people on the sand, on the ground, were trying to scream help," he told ABC News.
"A lot of people on the floor, kids crying, looking for their mum."
He said it was hard to believe something like this could happen in Australia.
"After today, I don't feel safe anymore."
NSW Premier Chris Minns described the reports and images coming from the scene as "deeply distressing".
Prime Minister Anthony Albanese said his thoughts were with all those affected,
"The scenes in Bondi are shocking and distressing," he said.
"Police and emergency responders are on the ground working to save lives."
Israeli President Isaac Herzog called the shooting as a "very cruel attack on Jews".
"The heart of the entire nation of Israel misses a beat at this very moment, as we pray for the recovery of the wounded, we pray for them and we pray for those who lost their lives," he said.
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