The man, identified by TV news channels as Sikandar Hayat, came to the busy Jinnah Avenue with his wife and two small children in a black Toyota Corolla car at about 5 pm.
After parking in the middle of the road, the man - who was carrying two locally made automatic weapons - began firing in the air close to a police check post. Soon after, numerous shops and businesses in Blue Area, one of the city's main commercial hubs, shut down and a crowd gathered in the area.
The man made several demands, including the imposition of Shariah or Islamic law in Pakistan. He said he should be given safe passage to leave the area. He was also heard saying that he wanted to negotiate with the Prime Minister.
The man's wife, identified in media reports as Kanwal, was seen speaking on her phone several times and mediating between her husband and police officials.
The media quoted police as saying that the man had a history of drug and alcohol abuse and was not mentally sound. Some reports said he was violent to his wife and children.
Analysts said the incident raised serious questions about security in the heart of Islamabad. Noting that the man was engaged in a standoff with police less than a kilometre from key buildings like the presidency and parliament, they questioned how the man had been able to enter Islamabad's "Red Zone" with weapons.