Philippine police shot dead a sacked former policeman as they stormed a bus on which he was holding 15 Hong Kong tourists hostage in downturn Manila on Monday, and China said seven hostages were killed.

Two more hostages were seriously wounded and Hong Kong leader Donald Tsang criticized the authorities handling of the siege, the violent final stages of which were beamed live by global news channels.

The gunman, identified as 55-year-old ex-police captain Rolando Mendoza who was armed with an M-16 assault rifle, had stopped the bus, which initially had 25 people on board, on a wide road in Manila's biggest park in the morning.

"The hostage-taker was killed. He chose to shoot it out with our men," police Colonel Nelson Yabut told reporters.

"On our first assault, Captain Mendoza was sprawled in the middle of the aisle and shot one of our operatives. On our second assault we killed him."

Yabut said a woman was seen moving at the back of the bus during the first attempt, and on the second assault the 30 commandos had used tear gas and flash bombs. Mendoza moved to the bus door, where snipers shot him, Yabut said.

"We did everything to negotiate and end this peacefully, but he gave us no choice," he said.

Police could be seen removing a body from the front of the bus before entering the vehicle and minutes later a number of hostages were helped off the bus.

Hong Kong Chief Executive Tsang, citing China's Foreign Ministry, said seven Hong Kong residents were killed, two severely wounded and the remaining six hospitalized in what he described as a "major tragedy."

"The way it was handled, particularly the outcome, I find is disappointing," he told a news conference in the city.

Philippines Interior Secretary Jesse Robredo said unofficial figures from hospitals where hostages were taken showed seven were dead. A bystander was also hit by a stray bullet .