(Adds details from late news briefing)
By Sharon Reich and Verna Gates
MIDLAND CITY, Ala., Feb 4 (Reuters) - U.S. authorities stormed an underground bunker in rural Alabama on Monday, rescuing a 5-year-old boy held hostage for nearly a week and leaving his kidnapper dead.
After a standoff of more than six days, FBI agents entered the bunker when they feared the child was in "imminent danger" at the hands of his abductor, who had killed a school bus driver, said Steve Richardson, special agent in charge in Mobile, Alabama.
The kidnapper, identified as 65-year-old Jimmy Lee Dykes, had previously allowed authorities to deliver medication, coloring books and toys to the kindergarten student, who is due to celebrate his birthday on Wednesday.
But negotiations deteriorated in the 24 hours before agents entered the bunker, Richardson told a news conference.
"Mr. Dykes was observed holding a gun," the FBI agent said.
Law enforcement officials would not confirm on Monday how Dykes died.
The standoff gripped a rural corner of southeast Alabama with dread, shuttering local schools and prompting prayers and vigils for the boy identified only as Ethan.
By all accounts, Dykes had taken him from the bus at random, reinforcing concerns that have been raised about U.S. school safety and gun violence since the December shooting deaths of 20 children and six adults at a Connecticut elementary school.
"It just shows you how close it can come," one of Dykes' neighbors, 42-year-old Angie Adams, said of the violence, adding she now plans one day to home school her 2-year-old daughter.
"We waited 10 years to have her and we would be devastated" if something happened, Adams said.
The drama near Midland City began when Dykes, a retired trucker who served in the Navy during the Vietnam War era, boarded a school bus ferrying more than 20 children home last Tuesday and demanded that the driver let a student off the bus, according to authorities.
When driver Charles Albert Poland, 66, refused, Dykes shot him four times with a 9 mm handgun, local sheriff's department officials said.
"To Mr. Poland's family, we would like to express our condolences," Dale County Sheriff Wally Olson said. "Also our appreciation to a hero who through his brave actions saved many lives."
Dykes fled with the child to a homemade bunker equipped with a television and electric heaters on the man's property off a dirt road. Authorities would not confirm news reports that said negotiators had remained in contact with Dykes by talking through a PVC pipe connected to the underground shelter.
The child was being treated at a local hospital but appeared physically unharmed, Richardson said. He is said to suffer from Asperger's Syndrome and attention deficit-hyperactivity disorder.
"He's laughing, joking, playing, eating," Richardson said. "He's very brave. He's very lucky."
A local law enforcement source said a stun or flash grenade was detonated as part of the operation to free the boy, but further details were not immediately released.
Late on Monday, bomb technicians were clearing the crime scene and looking for explosives, said FBI Special Agent Jason Pack. Authorities said the investigation could take days to complete.
Law enforcement officials offered few insights about Dykes and their negotiations with him before the rescue.
Dale County Sheriff Wally Olson said the gunman had a "very complex" story to tell.
"Based on our discussion with Mr. Dykes, he feels like he has a story that's important to him, although it's very complex," Olson said, without elaborating.
According to neighbors, the reclusive Dykes moved into the Midland City area about two years ago and was often seen patrolling the property where he lived in a trailer with a gun and flashlight at night.
He had been due to appear for a trial before a judge last Wednesday after his recent arrest on a menacing charge involving one of his neighbors.
Another neighbor, who said he grew up with Dykes and also served in the Navy around the same time, suspected the court case might have sparked his unraveling.
"When he kidnapped those kids, he was afraid of losing his property, his rights, his freedom and going to jail," said Mel Adams, who owns a used car lot.
But, Adams added, "We had no idea on Earth he would turn into a monster like this." (Additional reporting by Tom Brown; Writing by Colleen Jenkins; Editing by Cynthia Johnston, Cynthia Osterman and Xavier Briand)