NSW Police Assistant Commissioner Rod Smith said police were initially called to respond to a "domestic incident" outside Dubbo at 8.45am on Saturday.
"Whilst they were en route to that incident, they identified a Mazda which was being driven away from the scene," he told reporters on Saturday.
The driver was identified as being involved in the domestic incident, he said.
Officers attempted to stop the Mazda sedan around 9.15am on the Mitchell Highway near Dubbo.
The driver failed to stop and the pursuit was called off soon after due to safety concerns.
Police say the sedan crossed to the wrong side of the road and collided head on with the bus travelling in the other direction near the intersection of Mitchell Highway and Eulomogo Road.
The driver, a man believed to be 32, died at the scene.
He is yet to be formally identified.
Mr Smith praised the actions of the bus driver in saving multiple lives.
"The 50-year-old woman that was driving the bus took evasive action and probably saved the lives of a lot of people," he said.
"They're extremely lucky."
NSW Ambulance assessed 26 people at the scene with eight taken to Dubbo Base Hospital in a stable condition.
Seven bus passengers and the driver were all admitted for minor and non-life-threatening injuries.
Multiple ambulances were deployed to the area with patients aged between 10 and their 80s, authorities said.
A crime scene has been established with specialist police from the crash investigation unit on hand.
The investigation will be subject to an independent review and a report will be prepared for the coroner.
The highway is expected to be closed in both directions for some hours.
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