SWAT snipers killed Mohd Noor Fikrie late Friday while he threatened to set off a bomb in his backpack outside a crowded park in southern Davao city.
After months of surveillance, military and police intelligence officers had tracked the Malaysian to a budget hotel in the city last week.
Their efforts to capture him peacefully failed when he evaded police, held up a cellphone and threatened to use it to set off a bomb.
"I was just waiting for the blast," said police Senior Supt Ronald de la Rosa. "I thought I would never see my family again."
Intelligence officials had received information that Muslim extremists were planning to bomb foreigners in Davao, said de la Rosa, who heads the police force in Davao, a bustling city about 980km south of Manila.
Fikrie's wife, who was arrested, told investigators she and Fikrie had wanted to bomb a passenger bus for extortion, but de la Rosa said there were signs that the two had really wanted to target foreign aid workers.
Aid workers are using Davao as a hub to provide assistance to nearby provinces recently devastated by Typhoon Bopha, which left more than 1,000 people dead.
The target may also have been a Roman Catholic church, de la Rosa said, adding that two of five major bomb attacks staged in Davao city by Muslim militants in the past have targeted churches. Fikrie was discovered shortly before the start of popular pre-Christmas dawn Masses that pack churches nationwide with huge devotees, he said.
Police say Fikrie, 26, was a Middle East-trained bomb-making expert and close associate of fellow Malaysian Zulkifli bin Hir, who uses the nom de guerre Marwan and is one of Southeast Asia's most-wanted terror suspects.
Washington has offered a $5 million bounty for the killing or capture of Marwan, who reportedly perished in a US-backed Philippine military airstrike on southern Jolo island last February.
Several Philippine intelligence officials, however, believe Marwan survived the attack and remains in hiding in the south.
Fikrie arrived in the southern Philippines in April and had allegedly provided bomb-making training to foreign and Filipino Muslim militants in the south. He had wanted to acquire a Philippine passport, which he could use to travel to Syria for an unspecified purpose, according to a government dossier seen by The AP.
After tracking down the suspect, police asked hotel staffers to evict Fikrie and his wife, fearing they may set off a bomb if confronted inside the building, which was packed with guests. When the couple reached the hotel lobby, de la Rosa said he and other policemen tried to take them into custody, but Fikrie broke loose, held up a cellphone and threatened to detonate a 60mm mortar bomb in a backpack he was carrying, a police report said.
"If you arrest or shoot me, I have a bomb. I will explode it," the police report quoted Fikrie as saying to the police officers, who stepped back.
Fikrie dashed out of the hotel and ran toward a park, where a sniper shot him twice in the chest.
Another police officer shot him in the shoulder to prevent him from triggering the bomb with his cellphone, de la Rosa said.
The bomb, which was subsequently defused, was fashioned from a mortar shell, he said.
Fikrie's wife, a Filipino named Anabelle Nieva Lee who converted to Islam, was captured by police and was being interrogated, de la Rosa said.- AP