The killing comes as police and armed separatists are locked in a standoff near Freeport-McMoRan's mine, one of the world's biggest, with both sides blaming each other for what police have claimed was a hostage crisis.
Local authorities said unidentified gunman opened fire on a police patrol near the vast Grasberg mine in the early morning hours on Wednesday, following reports that a Freeport employee had been shot in the thigh on Tuesday.
One officer died at the scene while another was shot in the back, suffering severe injuries, Diaz added.
Papua has faced a low-level insurgency since it was annexed by Indonesia in the late sixties.
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Freeport's mine is frequently a flashpoint in the struggle for independence and a bigger share of the region's rich resources.
Police said they suspected Wednesday's shooters were from the same separatist group who they claimed have keeping some 1,300 residents in some nearby villages against their will.
"Their motive has been pretty clear since the beginning -- they believe they own the rich land where a big company is operating, but they are still poor and aren't getting justice so they want to disrupt Freeport's business," Diaz said.
"We are still trying to negotiate. But it seems unlikely at this point. They (the separatists) are not even willing to send anyone to talk to us," he added.
A spokesman for the activist group, linked to the Free Papua independence movement, could not be immediately reached.
A security source has told AFP that control over gold- panning operations in the area was behind the standoff.
The region is generally off limits to foreign journalists, making it difficult to verify the conflicting accounts.