By Barbara Liston

ORLANDO, Fla. (Reuters) - A gunman shot dead about 20 people and injured 42 others in a crowded gay nightclub in Florida early on Sunday before being killed by police in what U.S. authorities described as a "domestic terrorism incident".

A police officer working as a security guard inside the Pulse club exchanged fire with the suspect at about 2 a.m., police officials said. A hostage situation quickly developed before a squad of officers entered the club and shot dead the gunman. It was unclear when the victims were shot by the gunman.

"At ... 0500 hours this morning, the decision was made to rescue hostages that were in there. Our officers exchanged gunfire with the suspect. The suspect is dead," Orlando Police Chief John Mina told a press conference.

At least one officer was injured in the gunbattle but the police action saved at least 30 lives, Mina said.

The suspect was carrying an assault-type rifle and a handgun as well as an unidentified "device" on him, Mina said.

Police did not immediately name the gunman or provide a possible motive for the attack but officials have classified the rampage as a "domestic terrorism incident," Orange County Sheriff Jerry Demings said.

Javer Antonetti, 53, told the Orlando Sentinel newspaper that he was near the back of the dance club when he heard gunfire. "There were so many (shots), at least 40," he said. "I saw two guys and it was constant, like 'pow, pow, pow,'."

Police said they had carried out a "controlled explosion" at the club hours after the shooting broke out, but did not explain why that was done.

(Reporting by Chris Michaud in New York and Mary Milliken in Los Angeles; writing by Frank McGurty; Editing by Mark Heinrich)