OMAHA, Neb. (AP) _ A gunman who took eight hostages in a beauty salon and released all but one during a 24-hour siege was shot and killed by a police sniper Friday after threatening to detonate a bomb in a suitcase.

Michael Fane, 21, of Iowa City, Iowa, was shot by a SWAT team sniper about 2:45 p.m. Friday at the beauty salon and all of the hostages were safe, Police Chief Robert Wadman said.

A bomb squad was called in to deal with the suitcase.

''It did not explode when they attempted to detonate,'' Capt. Michael London said. ''All indications that they had at the time was that it had the makings of a bomb. I can't tell you whether there was an explosive device in there or not.''

Police said they had believed Fane had a 9mm pistol but found he had a 9mm look-alike pellet gun. Police said Fane probably could not have killed anyone with it.

''We believe Mr. Fane was suffering from severe mental problems'' and was under psychiatric care, Wadman said.

Early in the standoff, police said the hostage-taking occurred as the result of a botched holdup, but later said they didn't know why the camouflage-jacketed Fane entered the Possibilities salon about 3 p.m. Thursday.

Police sealed off the neighborhood and the gunman released four people, including a young boy, police said. After negotiating through the night, he freed three women Friday. His final hostage, a woman, was freed apparently unharmed after he was shot.

Police would not release the names of the hostages, but relatives and friends said three of the final four were Debbie McQueen, 28, and shop employees Darla Lordemann and Sharon Kuhlmann, 18.

London said Fane was shot while trying to pick up a package he had demanded from police that was placed by the door.

At a news conference, London said police decided to shoot Fane if it became possible because they believed he had a suitcase bomb with a ''pressure point'' that would detonate if he touched it.

''About 6 this morning, negotiations deteriorated seriously because they found out at that time there was a great likeliehood there was a bomb or the makings of a bomb or a bomb apparatus in a suitcase,'' London said.

Police evacuated bystanders west of the former bank building and moved reporters and photographers a distance away because of fears they could be hurt if a bomb was detonated.

Fane, a 1985 graduate of Mason City, Iowa, High School, attended the University of Iowa in Iowa City for two years. His father, Dr. Larry Fane of El Compo, Texas, told the Mason City, Iowa, Globe-Gazette that his son recently received psychiatric treatment.

Dean Chandler, Fane's grandfather, said of Fane, ''He's always been very passive and mild around us. This is the biggest surprise of my life and that's all I'm going to say.''

The gunman negotiated undisclosed demands with police, Capt. William Crawford said during a Friday news conference. He would not say what the demands were, but he did say the gunman had not asked for money.

Sgt. William Muldoon said police knew ''quite a bit'' about the gunman, but would not elaborate. He had said the man had remained calm during negotiations.

''He is talking, so that's always a good sign,'' Muldoon said. ''He's not doing anything directly at this time to harm the people. ... If he starts harming people we will have to re-evaluate the situation.''

A minister and family members of the hostages were assisting police in negotiations. More than 40 family members gathered at a nearby house Thursday night and were taken to a Salvation Army center to meet with police chaplains and other clergy.