The alarm was sounded when a man wearing camouflaged clothing and a balaclava entered Work and Income office about 10am armed with a sawn-off shotgun.
The man shot three Work and Income workers, killing two and seriously injuring the third, who was flown to Christchurch Hospital and is in a critical condition.
He fled the scene on a bicycle he had chained up outside the office.
Canterbury District Superintendent Gary Knowles said: "This is a very, very tragic event. Two people have lost their lives," Mr Knowles said earlier today.
He wouldn't say if the dead were male or female, nor would he say how many shots were fired.
Nor would he say if Mr Tully had an appointment at Work and Income this morning, or why he was there.
Tully was found by police dogs at a rural property near Lake Hood, the search area the police have been concentrating on for most of the day.
Mr Knowles said there was "minor resistance" and that Tully had received minor dog bite wounds. No officers were injured.
Tully was tracked for some distance. No shots were fired and there was no standoff. "We're still searching for his weapon," Mr Knowles said.
He was arrested and taken into custody at Ashburton police station but no charges have yet been laid.
Mr Knowles said Tully would be medically examined before being formally interviewed and charged.
There had been two sightings earlier in the day and as a result, the chopper was put in the air, along with AOS, STG, and dog patrols.
The capture will be a "huge relief" for local community, he said. "It gives them some closure and safety tonight to think they can go home and not worry," he said.
"We had the whole area contained but as I said, it's the small town New Zealand.. dealing with things ... it's been horrific today." Mr Knowles couldn't say if he had been under the influence of drugs.
"Nothing will give the families who lost loved ones closure but I think a community can go to sleep tonight with the thought that the person we believe may be responsible is in custody."
Ashburton Mayor Angus McKay said was a very community-minded town and the tragedy would affect many lives.
He became emotional when talking about it: "It just hits home real hard."
The Education Ministry contacted schools and early childhood centres in the area and told staff to keep children inside.
A hockey tournament at Ashburton College was cancelled and the students were taken inside.
Residents of Ashburton were tonight gathering at the station. Abuse aimed at the arrested man was hurled at the van as it arrived and there was praise for the police.
"Go the police," said one while another said: "They've a risked their lives today. I can sleep now."
Thoughts were with the victims and their families. "Those poor people. I don't get it," said one woman.
Prime Minister John Key said he was "shocked and disturbed" by the shootings and offered his "sincere condolences" to the family and friends of the dead and the injured.
"There will be many questions to be asked and answered in the coming days about how this happened," he said.
"Every day New Zealanders get up in the morning to go to work or to visit Government departments, and their families expect them to return home.
"In this case, that has not happened. My thoughts are with the loved ones [of] those who have lost their lives."
Winz shuts Canterbury offices
Meanwhile, police in New Plymouth are speaking to a man over a threatening phone call made to the city's local Work and Income office earlier today.
The Ministry of Social Development Chief Executive Brendan Boyle said all their offices in Ashburton, Timaru and Christchurch would be closed until further notice.
Mr Boyle said in a statement: "We are all shocked by the news of this morning's incident at the Ashburton Work and Income office.
"The police are handling this serious situation. What I can say is that we will be there for our colleagues to support them as they come to terms with what has happened.
"Until we know more, we have closed all Ministry of Social Development offices in Ashburton, Timaru and Christchurch."
The Public Service Association (PSA) said the shooting was a tragedy.
National secretary Richard Wagstaff said: "Our thoughts are with all those affected by this tragedy.
"We don't know what the cause is, but we will be supporting our members from Ashburton Work and Income at this terrible time. That two people have died and one more is in a serious condition is inexcusable, and we hope the police can bring the shooter to justice.
"Nobody should go to work in the morning without returning home that same day.
"Our 6500 members working at Ministry of Social Development will have their Ashburton colleagues in their thoughts."
