Authorities said the suspect, a 42-year-old Norwegian citizen of Iranian origin, was believed to be a radicalised Islamist with a history of mental illness who had been known to intelligence services since 2015.
The attack took place in the early hours of Saturday, with victims shot inside and outside the London Pub, a longstanding hub of Oslo's LGBTQI scene, as well as in the surrounding streets and at one other bar in the centre of the Norwegian capital.
The deceased were two men in their 50s and 60s, police said in a statement.
Ten people were seriously wounded and 11 had minor injuries.
"Everything indicates that this has been an attack by an Islamist extremist," Norway's Prime Minister Jonas Gahr Stoere told a news conference.
"We don't (yet) know if the queer community was the intended target, but we know it is a victim," he said.
Bili Blum-Jansen, who was in the London Pub, said he fled to the basement to escape the hail of bullets and hid there along with 80 to 100 other people.
"Many called their partners and family, it felt almost as if they were saying goodbye. Others helped calm down those who were extremely terrified," he told TV2.
"I had a bit of panic and thought that if the shooter or shooters were to arrive, we'd all be dead. There was no way out."
Rainbow flags symbolising the Pride community were on prominent display across Oslo this week, but Saturday's planned parade was cancelled at the advice of police.
"Last night the rainbow was coloured black," said Anette Trettebergstuen, Norway's minister of culture and equality and herself a prominent campaigner for LGBTQI rights.
The suspect was detained minutes after embarking on the shooting spree, according to police who said they believed he acted alone. Two weapons, including a fully automatic gun, were retrieved from the crime scene, they added.
Other witnesses described the chaos that erupted inside and outside the London Pub, which has been open since 1979.
Journalist Olav Roenneberg of public broadcaster NRK said he was in the area at the time and saw a man arrive with a bag, take out a gun and start to shoot: "Then I saw windows breaking and understood that I had to take cover."
It was not clear exactly where the two people were killed in the area of the London Pub.
Security authorities raised the country's terrorism threat assessment to its highest level following the attack.
Norwegian police, who are not normally armed, will carry guns until further notice as a precaution, national chief Benedicte Bjoernland said.
The Nordic nation of 5.4 million has lower crime rates than many Western countries, though it has experienced hate-motivated shootings, including when far-right extremist Anders Behring Breivik killed 77 people in 2011.Â
