As election security was boosted, the military denied involvement in the shooting of in a country whose history is chequered by coups and deadly score-settling between the army and state.
The national elections commission said the murder was "an isolated case".
"Events last night have nothing to do with the electoral process," said polling chief Desejado Lima da Costa.
Election observers from the African Union and Economic Community of West African States (ECOWAS) said despite minor problems here and there the election was acceptably free, fair and transparent.
"The mission hopes that this election should pave the way for further political, economic and security reforms needed for the development of the country," said ECOWAS mission chief Salou Djibo.
Guinea-Bissau's election is being held up as a test of the country's commitment to stability -- with post-poll army reform seen as vital to normalising a dysfunctional state sorely in need of development.
However, just hours after a peaceful day of voting ended, former army intelligence chief Diallo was shot dead by men in military dress as he sat on the terrace of a restaurant near his home, sources said.
"There is a lot of concern and apprehension," political analyst Rui Landim told AFP as early results trickled in. "If everything is handled peacefully we can save the stability, but for now there is a risk that things degenerate."
No clear motive has emerged for the killing of Diallo, who was accused of involvement in a 2009 bombing that killed the country's then army chief and prompted the murder of president Joao Bernardo Vieira in a revenge attack a few hours later.
"They shot at him (Diallo) over five times," police said, adding the body was taken to his home.
Daba Na Wagna, co-ordinator of a joint military-police election security team said Diallo's murder was "deplorable because there was a loss of human life, but the army was not involved from any angle".
Diallo was director of military intelligence until April 2010, when he was arrested with other top officers on suspicion of involvement in the 2009 attack.
It was also in April 2010 that the country was rocked by an army mutiny in which the army chief was overthrown by his deputy and former prime minister Carlos Gomes Junior was briefly abducted and threatened with death.
The mutiny prompted the European Union and the United States to suspend monetary aid for badly needed reforms to the army, which receives 10 percent of the country's budget.
Gomes, who stepped down from government to run in the presidential election, was among three frontrunners in early results alongside former president Kumba Yala and national assembly speaker Serifo Nhamadjo.
A total of nine candidates contested the vote and provisional results should be released by the weekend.
Although the election period has been peaceful, some fear violence or even military intervention if the army does not approve of the winning candidate.
Guinea-Bissau achieved independence from Portugal in 1974, the only west African nation to do so through armed combat.
But ever since then, the army and state have remained in constant, often deadly conflict, with the result that no president has ever completed a full term in office. Three have been overthrown in coups and one was assassinated in office in 2009.
A dysfunctional state with a porous coastline and an archipelago where hidden airstrips can be set up, it has also provided fertile ground for Latin American drug lords looking for a hub to ship their cocaine to Europe.
Sunday's election came after the last president, Malam Bacai Sanha, died in January following a long illness.