A bikie fatally shot outside a service station southwest of Sydney told his killer "don't do it", witnesses have told.

Senior Rebels motorcycle gang member Darren Wallace, 32, was shot in Picton's Argyle Street following a dispute with a man who is believed to be a former member of the same club.

Internal conflicts are reportedly behind the killing which happened just after midday yesterday outside the Coles Express service station.

Mr Wallace, who was believed to be the sergeant-at-arms of the local chapter of the Rebels, was also a local business owner.

The man was shot at a Picton petrol station. (9NEWS)

His shop Such as Leather was hit by a spray of bullets in a drive-by shooting in November, though police are uncertain whether the two shootings are linked.

The small town went into lockdown following the killing after the shooter fled the scene.

His body was discovered in the nearby Picton Creek a short time later.

Police say his cause of death is yet to be confirmed, but say officers did not fire any shots during the search.

Detective Superintendent Wayne Benson told reporters at the scene that both men were known to the police.

Shooting victim Darren Wallace. (Supplied)

"I can say that both deceased men were members of outlaw motorcycle gangs and known to each other," he said.

Det Supt Benson said police would continue to monitor incidents across NSW in case of any revenge attacks.

Heavily armed police converge on the graveyard where the second man's body was found. (9NEWS)

A number of local businesses shut down on police advice to ensure the safety of their staff.

Police have blocked off several streets in Picton. (9NEWS)

Police did not answer questions about the type of weapon used in the shooting, or whether it was recovered.

Local Ron Davies heard the shots ring out from across the road and said the shooter turned around and walked calmly back down the street.

Shocked paramedics who were parked nearby rushed to the scene in seconds but there was nothing they could do, he told AAP.

"They were arguing. The guy who was shot said to the other guy 'Don't do it' and he just went bang and shot him," he said.

There are reports the two men had come from a local tattoo parlour.

"Everyone's surmising. The tattoo parlour was shot up about five weeks ago or so," Mr Davies said.

The Argyle Street service station, which is opposite the Picton police station and courthouse, has been blocked off.

Video from a Nine Network helicopter above the Picton service station showed a body covered in a white sheet lying near the petrol pumps.

A shopkeeper close to the scene described to News Corp Australia's local paper Macarthur Chronicle the anguish of emergency service staff responding to the traumatic events.

Tactical police with a Bearcat armoured vehicle. (9NEWS)