The U.S. Embassy said an American employee was involved in the incident in Lahore, but could not confirm details.
Police officer Umar Saeed said the men were suspected robbers, but provided no evidence to back up the statement. He said the American, who was not identified, shot at the men in self-defense.
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.
Lahore police chief Aslam Tareen said the American was being questioned by the police and may be charged with both murder and illegally carrying a weapon: a Beretta pistol. The American shot both men after they pointed guns at him at an intersection, Tareen said.
"Diplomatic staff usually enjoy a certain type of immunity, but I am not sure about murder," he said. "We will consult the Foreign Office and legal advisers in this regard."
The gunmen approached the American's vehicle on a motorbike, said Saeed, the police officer. The American managed to alert colleagues in a car behind him who hit and killed a passer-by as they rushed to the scene, he said.
Local TV showed footage of what it said was the American's car, which had several bullet holes in the front windshield. It also showed one of the gunmen laying dead next to a motorbike with a pistol on the ground nearby. The other gunman was shown being placed in the back of an ambulance and appeared to be wearing a holster.
In the northwestern city of Peshawar in 2008, gunmen shot and killed an American aid worker as he drove to work. Suspected militants also opened fire on the vehicle of the United States' top diplomat in the city the same year, but she survived the attack.
Street robberies are not uncommon in Pakistan, and foreigners would be perceived as lucrative targets in the poor country.
Lahore is a city of 12 million people in eastern Pakistan not far from the Indian border. The United States has a small diplomatic mission there.
While the facts of the incident are still being established, it may add to anti-American rhetoric in the country.
A few dozen people protested outside the police station where the American was being held. They burnt tires and one of them held up a sign saying "American dog."
Sections of the Pakistani media are prone to fanning right-wing conspiracy theories that frequently feature armed foreigners roaming the country at will, violating its sovereignty. The United States is pumping millions of dollars in aid to the country, but many people still regard it with suspicion or outright enmity.