The agency said that Rozi Khan, the governor of the Chora district in southern Afghanistan's province of Uruzgan, was killed during a shootout involving Australian troops in the region. The firefight happened near the Australian Defense Force (ADF) base.
"It is not possible at this time to determine that he was killed by ADF fire," a military statement said.
Local reports indicated that Khan had gone to the assistance of a friend who had mistaken international forces outside his house for Taliban militants. The international forces are believed to have then mistaken Khan's group for militants, resulting in a gun battle.
The Australian military claims it had come under fire from several different directions before taking action, admitting that the situation was "not clear at present." It also said that "it is possible that a number of Afghan police may have been killed."
"The facts are unclear at this stage, according to my advice. As soon as they become clear, then we will have something further to say," Australian Prime Minister Kevin Rudd said in statement.
Afghan President Khamid Karzai expressed his deep condolences to the governor's family, saying Khan had contributed greatly to the development of the country. He also said the late governor had been a close associate.
ISAF has about 53,000 troops operating in Afghanistan under a UN mandate to give security support to the government and stop the flow of drugs from the central Asian country.