The statement from the embassy raised the stakes in what could emerge as a major dispute between Pakistan and the United States. It also showed the shaky nature of ties between the two nations, a relationship Washington believes is crucial for success in Afghanistan and against al Qaeda.
Pakistani prosecutors said Friday they would pursue murder charges in the case.
After the U.S. publicized its demand Saturday, the Pakistani Foreign Ministry issued a statement referring to the arrested man as a "U.S. functionary." The ministry said that because a judicial process was now under way it had "no substantive comments to offer."
The killings in Lahore on Thursday added to already strong anti-U.S. sentiment in Pakistan. Islamist and nationalist commentators have portrayed the incident as an example of American brutality and called on the government - often criticized for being too beholden to Washington - to punish the man.
The embassy said the man was acting in self-defense when he shot and killed two armed men as they approached his car. It said the men wanted to rob him, something police also have said. A third Pakistani died when he was allegedly hit by an American car that rushed to the scene to help the U.S. official.
"The United States Embassy in Pakistan calls for the immediate release" of the diplomat, said the statement, adding that it regretted the loss of life.
The man, who has not been named by the U.S., was taken into custody soon after the shooting. U.S. officials were granted access to him only late Friday.
Pakistani officials have largely ignored questions over any immunity the American may have, and the U.S. statement Saturday did not address key questions, including exactly what the American's job is or whether he was legally entitled to carry a gun.
U.S. Embassy spokeswoman Courtney Beale told The Associated Press that the official was "a member of the administrative and technical staff." Separately, a senior U.S. official told AP that the man was authorized by the United States to carry a weapon, but that it was "grey area" whether he could do so in Pakistan.
The issue of American diplomats or their security details carrying weapons inside Pakistan was a hot-button subject last year among certain politicians and sections of the media, which were pushing conspiracy stories about armed U.S. spies roaming the streets, threatening ordinary Pakistanis. The Pakistani government never clearly stated who and under what circumstances foreigners were allowed to carry arms.
Allowing the American to return home without facing trial could be politically damaging for the Pakistani government, which is already weak. Earlier this month, the governing coalition nearly collapsed when a key member party threatened to join the opposition.
"This is a test case for our rulers," said Maulana Fazlur Rehman, head of the Jamiat Ulema Islam party. "A foreigner, an American cannot be allowed to shed blood this way. The matter is in the court. The facts will be revealed there."
Under widely accepted international conventions, diplomats are generally free from prosecution in the countries they work to ensure that they do not become victims of rivalry between the states. Sometimes diplomats accused of serious crimes face trial in their own country.
Western diplomats travel with armed guards in many parts of Pakistan because of the risk of militant attack. Lahore has seen frequent terrorist bombings and shootings over the last two years, though the city's small expatriate population has not been directly targeted.
The senior U.S. official said the embassy was concerned about the man's safety inside a Pakistani jail. He said the killing of the governor of Punjab province earlier this month by a police officer assigned to guard him had alarmed many in Washington.
The official, who spoke on condition of anonymity because of the sensitivity of the case, said he understood that some Pakistanis were angry about the incident. But that he was concerned officials in the Punjab were "pandering" to those emotions instead of calming, citing a visit Friday by the province's chief minister to the home of the Pakistani killed in the car accident.