A number of bystanders, including young children, watched in horror as one of the men threatened to shoot his neighbour in a "heated row".
The man, who is a registered gun owner, entered his house following the row and returned wielding a shotgun.
He was seen wandering the estate in what sources have described as a "furious state."
However local gardai were quickly on the scene and managed to defuse the situation before it spiralled out of control.
A file is now being prepared for the Director of Public Prosecutions (DPP).
The events took place in the Meadowvale Estate in Arklow town last week.
Well-placed sources told the Herald that the pair involved in the row are known to each other and have been involved in a "long-running feud".
Gardai interviewed both the men and are keeping a close watch on simmering tensions in the area.
After receiving the call about the presence of a gun, officers arrived in the estate within minutes and found a number of neighbours in a hysterical state.
They entered the property of the gun owner and removed a number of firearms, including shotguns and rifles.
The guns, which include two BA action rifles and a shotgun, are still in the possession of local officers.
Sources said that there were a number of children present in the estate when the drama unfolded on December 27.
"It was an absolutely terrifying incident for the people in this estate. Meadowvale is very quiet and nothing like this has ever happened there before," a source explained.
"Gardai are keeping a close watch on the situation so as to ensure tensions don't erupt again," the source added.
It's understood that the pair had been engaged in a row on St Stephen's night but confronted each other in the middle of the estate the day after.
It's believed that the gun owner threatened to "shoot" his neighbour during the row, before grabbing his shotgun from his home.
Gardai have managed to defuse the situation and have reassured concerned families.
"This was an isolated incident. However, the fact of the matter is, there were kids out playing on the estate and they should never be exposed to a row of this kind.
"It's just lucky that nobody was hurt," a source said.