The deceased, identified as Shyam Dabhade, had a string of cases pending against him in various police stations in Pune district, ranging from murder to robbery.
According to a police official, Dabhade's movements might have got restricted because of the cash crunch following demonetisation of high value currencies.
While Shetty was murdered in 2010, BJP leader Sachin Shelke (38) was hacked to death last month in broad daylight in Talegaon Dabhade, about 35 kms from here.
"After conducting combing operation for the whole night, Dabhade and his aide were located near windmills close to Varsai and they were asked to surrender by our four teams headed by senior police inspector Ram Jadhav," he said.
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However, instead of surrendering, the duo fired eight rounds at the police teams and in retaliation, the policemen too fired five rounds.
"In the retaliatory fire, both were injured seriously and taken to Chakan rural hospital where they were declared brought dead," the SP said.
"After the gruesome murder of Shelke on October 16, there was a panic among the industries and local people. After today's incident, a strong message has gone to goons in area and the incident will have impact on the criminal activities in the area," he said.
Dabhade had 19 cases registered against him in various police stations including of murder, attempt to murder, extortion, Arms Act, and robbery.
"We have registered a case of 307 (attempt to murder)
"The investigation of the attempt to murder case will be done by sub divisional police officer of Khed division," said Nangre Patil.
He said Dabhade who always used to possess Rs 2 lakh to Rs 3 lakh in cash while on the run could have been experiencing the cash crunch due to demonetisation.
"This might have impacted his movement and made him stationary. We have recovered four fire arms and cash worth Rs 50,000 from his possession, however, it was in the form of old notes," the officer added.