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A retired NYPD sergeant was shot and killed by police this morning after the raving ex-cop opened fire on officers outside his Staten Island home, sources said.

Jason Aiello, under investigation by both the NYPD and the FBI for his possible role in the April murder of his former employer, screamed at officers as he waived his 9 mm handgun.

"Jason, drop the gun!" at least one of the responding officers hollered.

Aiello was warned a second and third time, but instead of dropping the weapon, he started shooting. Police returned fire and fatally struck Aiello in the head as his wife and three terrified children, ages 7, 4 and 2, watched in horror.

"He was a cop," a police source said. "He knew what to do when ordered to drop his weapon. It looks like suicide by cop."

Officers raced to Aiello's home after at least three 911 callers reported a crazed gunman threatening his family, sources said.

Aiello's wife had already gotten the couple's three children - son, 7, and daughters, ages 2 and 4 - into a car to escape when the officers arrived, sources said.

Aiello's name surfaced on April 29 after his boss, Louis Antonelli, a jeweler and his longtime friend, was gunned down outside El Sabor Tropical in West Brighton.

Antonelli, 43, had more than $200,000 worth of jewelry with him when he was shot, but the loot was not touched.

Aiello, a sometime bodyguard for the jeweler, was inside the restaurant at the time of the shooting and wasn't hurt. Antonelli died May 12 from his wounds.

"Everybody was watching Aiello. He was under a great, big spotlight," a law enforcement source said. "Apparently, he couldn't take it."

Two men were charged with murder in Antonelli's murder. Law enforcement sources haven't ruled out mob ties in that shooting.