Residents have been told to stay indoors and avoid the area of the shooting.
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A fourth person has been taken to hospital in a serious but stable condition.
Local police are now investigating the reported shooting which took place in Lake Cargelligo at about 16:40 local time (05:40 GMT).
Police have also told the public to avoid the area and that local residents should stay inside. Local reports say that the gunman is still at large.
A police statement said emergency services were called to Walker Street near Yelkin Street following reports of the shooting.
The Sydney Morning Herald reports that the incident was a suspected domestic violence attack.
It also reports that authorities are still trying to locate the gunman and that heavily armed tactical police have been deployed.
Seven News reports that the gunman had fled the scene in a vehicle owned by the local council.
Lake Cargelligo is located in the centre of New South Wales and has a population of about 1,500 people.
The incident comes after last month's mass shooting at Sydney's Bondi Beach which killed 15 people.
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