Detectives continued to scour the scene in Sydney's inner west on Tuesday after officers found a man, believed to be aged 29, stabbed to death about 5pm on Monday in Croydon Park.
A 32-year-old man arrested at the scene is assisting police with their inquiries and has not been charged.
Another man is wanted for questioning.
Police released images of this man on Tuesday, saying he was last seen on the street where the stabbing occurred on Monday afternoon.
The man already in custody was taken to hospital for assessment under police guard.
He had attempted to flee the crime scene when police attended but was quickly apprehended, Superintendent Christine McDonald said.
"This is a gruesome crime," she told reporters on Monday evening.
"The man's injuries are horrific, and what we know from very preliminary investigations is that ... we believe this is a drug deal gone horribly wrong.
"We didn't give him any time to run away, we were here too quick."
On Tuesday morning, police were crawling over the quiet street as they attempted to piece together what happened.
The dead man was found with multiple stab wounds to his neck and police are treating the investigation as a homicide.
Speaking on Monday night, Supt McDonald said police were unsure of who lived at the house, who had attended before the fatal incident and the reason they were meeting.
"We don't believe it to be domestic-related, we don't believe it to be gang-related, but we need to work through all those steps of the investigation," she said.
"The community down here would be shocked that something ... so brutal has happened in their street."
The man who died has not yet been formally identified.
Supt McDonald did not detail why she believed the incident had stemmed from a drug deal.
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