The shooting happened just minutes away from Hagley Oval, where the test was set to be held, and the Bangladesh cricket team narrowly avoided the incident, having to flee the scene.
The team had just arrived at the Al Noor Mosque for Friday prayer when a gunman opened fire, with video showing several Bangladeshi players and media escaping the scene.
New Zealand Cricket CEO David White confirmed that the third test has been called off as a result of the attack.
"On behalf of NZC - heartfelt condolences to those affected.
"We've cancelled the game. I've spoken to my counterpart at Bangladesh cricket - we agree it's inappropriate to play cricket at this time."
The decision was a joint one between New Zealand Cricket and Bangladesh Cricket, with White saying NZC were shocked and appalled by what had unfolded.
"Both teams are deeply affected.
"As a country we'll have to look at [security of visiting teams]. It seemed to be a safe haven. I'm sure all of New Zealand will take a look at their approach."
Mohammad Isam, a Bangladeshi journalist for Cricinfo who was on the scene, said that all the players are safe, but want to fly back to Bangladesh.
