Dulmatin, 40, was one of Indonesia's most wanted men for his suspected part in the deaths of 202 people in the tourist district of Kuta on the southern Indonesian island of Bali. He was also known as Yahya, Mansur or Joko Pitono and was alleged to be a leading member of Jemaah Islamiah, a militant group with links to al-Qaida.
The United States had placed a $10 million reward for capture of the elusive militant. He was shot by police while in an Internet kiosk in the Jakarta suburb of Pamulang City, local media reports said.
The Bali bombing in October 2002 was the deadliest act of terrorism in the history of Indonesia. More than three dozen Indonesians died and more than 150 of the 202 dead were foreigners, including 88 Australians. Around 240 people were injured.
Three bombs were detonated -- a backpack-mounted device carried by a suicide bomber, a large car bomb and a third smaller device detonated outside the U.S. consulate in Denpasar, causing only minor damage.
In a television interview in Canberra, Australia, the Australian Prime Minister Kevin Rudd congratulated Indonesian police, The Jakarta Post reported, saying: "It has been a professional operation by Indonesian authorities. This is difficult, hard and dangerous work. I congratulate the Indonesian authorities for this."
Indonesia's President Susilo Bambang Yudhoyono, on a visit to Australia, also praised the police work.
Indonesia's anti-terrorist forces have stepped up efforts in past month, including a series of raids after the discovery of an alleged Islamist militant training camp in the southern province of Aceh.
Dulmatin died in a hail of bullets after he managed to fire one shot at police, the Post reported.
"The suspect fired a shot. Another five rounds remain inside the revolver's magazine," said National Police spokesman Inspector General Edward Aritonang. A revolver and another 12 bullets were found on the body.
Dulmatin was one of three suspected militants shot by police this week. The other two were killed in a raid on a house in a south Jakarta suburb on the same day.
"They supplied weapons and financial aid to the terrorist group in Aceh," Edward told a news conference in Jakarta.
Authorities have been cautious in pronouncing the identity of victims of shootouts and police took nearly 48 hours before announcing that the single man they killed was Dulmatin.
In September a nine-year hunt for another of Indonesia's most wanted terrorist suspects ended after Noordin Mohammad Top, 41, was killed in a shootout with police in Surakarta. DNA testing on another dead suspected terrorist a month earlier proved that the body was not that of Noordin, as at first believed.
Noordin, like Dulmatin, was believed to be a leading member of the al-Qaida linked group Jemaah Islamiah. Noordin was wanted for involved in the Marriott and Ritz-Carlton bombings in Jakarta in July. The bombings were the first major incidents in Indonesia since August 2003, when the same Marriott hotel suffered a car-bomb attack leaving 12 people dead and 150 injured.
Two days after the shootings two shopping malls in the same area received bomb threats from an unidentified caller claiming to be a member of Jemaah Islamiah.