Balinese police have retracted reports that a gunman sought after allegedly killing an Australian man and critically injuring in another in an attack in a private villa has been arrested.

The shooting happened at Villa Casa Santisya near Munggu Beach in the district of Badung, north of the tourist hub of Kuta, on Saturday night.

Police identified the victim as Zivan Radmanovic, 32, from Melbourne and the injured man as Sanar Ghanim, 34, who is also from Melbourne. He was seriously wounded and taken to intensive care.

Radmanovic’s wife, 30-year-old Gourdeas Jazmyn, was also inside the private villa when she woke to her husband’s screams shortly before midnight.

She cowered under a blanket when she heard multiple gunshots.

Jazmyn later found her husband’s body and the injured Ghanim, whose wife has also testified to seeing the attackers.

Ghanim was found badly beaten and shot multiple times. He remains in a critical condition under police guard in a Bali hospital.

Police have said only three rooms of the villa were occupied at the time, with five guests.

Radmanovic was shot in a bathroom, where police found 17 bullet casings and two intact bullets.

At least three witnesses at the villa told investigators that two gunmen, one wearing orange jacket with a dark helmet and another wearing a dark green jacket, a black mask and a dark helmet, arrived on scooters at the villa about midnight.

Witnesses have described hearing thick Australian accents.

Local police said the two alleged gunmen fired at least 17 rounds before fleeing on the scooters.

“They tried starting the motor once… twice… three times it failed and then they sped off,” one local told the ABC.

Another witness, who initially mistook the shots for something else, said, “I thought it was a metal sheet falling hard… The sound was so loud – bang!”

Balinese police said on Monday that the suspected gunman is helping officers with their inquiries at Badung Police Station, while a second suspect remained on the run.

However, they retracted the report hours later.

“There is yet to be any arrest,” a spokesman said, adding there had been a “miscommunication”.

Instead, police said they had identified one of the hitmen. They believe he has fled Bali, although he is still in Indonesia.

The Department of Foreign Affairs and Trade said earlier it was providing consular assistance to the family of the victim.

“We send our deepest condolences to the family at this difficult time,” a spokesperson said.

“DFAT stands ready to provide consular assistance to another Australian injured in the same incident.”

Radmanovic’s grieving family is now calling for a full investigation, urging Indonesian authorities to bring those responsible to justice.