The gunman was tackled by congregants and eventually taken into police custody.
Jim D. Adkisson, 58, was charged with first-degree murder and was being held on $1 million bail, according to city spokesman Randy Kenner, who did not know if the suspect had retained an attorney. Authorities were searching Adkisson's home in the Knoxville bedroom community of Powell, Kenner said.
The man slain was identified as Greg McKendry, 60, a longtime church member and usher. Church member Barbara Kemper told The Associated Press that McKendry "stood in the front of the gunman and took the blast to protect the rest of us."
Linda Kreager, 61, died at the University of Tennessee Medical Center a few hours after the shooting, Knoxville city spokesman Randall Kenner said.
Five people remained hospitalized, all in critical or serious condition. Two others were treated and released.
The gunman's motive is not yet known. The church, like many other Unitarian Universalist churches, promotes progressive social work, such as desegregation and fighting for the rights of women and gays. The Knoxville congregation has provided sanctuary for political refugees, fed the homeless and founded a chapter of the American Civil Liberties Union, according to its Web site.
Kemper said the gunman shouted before he opened fire.
"It was hateful words. He was saying hateful things," she said, but refused to elaborate.
The FBI was assisting in the case in case it turns out be a hate crime, Police Chief Sterling Owen said. Police were taking statements from witnesses and collecting video cameras from church members who taped the performance.
There were about 200 people watching a performance by 25 children based on the musical "Annie" when the shooting took place.
Church member Mark Harmon said he was in the first row. "It had barely begun when there was an incredibly loud bang," he said.
Harmon said he thought the noise was part of the play, then he heard a second loud bang. As he dove for cover, he realized a woman behind him was bleeding. She looked like she was in shock, touching her wound, he said.
"It seems so unreal," Harmon said. "You're sitting in church, you're watching a children's performance of a play and suddenly you hear a bang."
Harmon said church members just behind him in the second and third rows were shot. His wife told him that she saw the gunman pull the shotgun out of a guitar case.
Witnesses reported hearing about three blasts from the .12-gauge shotgun, which spreads pellets out when the shot leaves the barrel. Witnesses said they did not recognize the gunman.
Church members said the gunman was tackled by John Bohstedt, who played "Daddy Warbucks" in the performance. He declined comment when reached by phone at his home.
Friends of McKendry said he was friendly with everyone.
"Greg McKendry was a very large gentlemen, one of those people you might describe as a refrigerator with a head," said member Schera Chadwick, whose husband, Ted Lollis, arrived at the church just after the shooting. "He looked like a football player. He did obviously stand up and put himself in between the shooter and the congregation."
McKendry and his wife had recently taken in a foster child.
The church's minister was on vacation in western North Carolina at the time of the shooting but returned Sunday afternoon.
"We've been touched by a horrible act of violence. We are in a process of healing and we ask everyone for your prayers," the Rev. Chris Buice said in a statement outside the church. "I will tell you we love Greg McKendry. We are grieving the loss of a wonderful man."
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