Surgeons were later trying to save the arm of the chain saw victim, Mark Jorgenson, 29, while his neighbour Troy Thornton, 26, was being treated after losing his finger to the Samurai sword.
Police who rushed to the small town of Minto, south west of Sydney, found pools of blood in the street and Mr Jorgenson crying in pain from his almost-severed arm.
Fight: Two neighbours battled each other with a chainsaw and samurai sword - ending with a severed arm and a chopped off finger
Detectives are investigating claims that after the two men argued over loud music and reckless driving, Mr Thornton went to Mr Jorgenson's house with the chain saw.
Mr Jorgenson grabbed the Japanese sword and the bloody battle began. Detective Chief Inspector Mark Brett described the result of the confrontation as 'horrific'.
He said: 'A chain saw is a serious weapon which inflicts pretty brutal injuries.
After paramedics said that Mr Jorgenson's arm was so badly damaged that they believed it would have to be amputated, his father Laurie told Sydney's Daily Telegraph that the brawl with the next-door family started in the afternoon following complaints about noise.
Warring: The men were taken to hospital in an ambulance, and are now being treated for their wounds
Mr Thorton's mother, Wendy, confirmed that her son did wield the chain saw, but said he grabbed it to defend himself.
'They (the Jorgensen family) had machetes and bats and we had nothing so Troy grabbed the chain saw,' she said.
The two families agreed they had been involved in an ongoing war but Mr Jorgensen said sorting it out with a chain saw was extreme. 'Fists maybe, but this is just over the top,' he said.
Mr Thornton's family explained that he had been staying at the house to comfort his sister Nicole, who had recently lost her partner when his small boat overturned on a river.
Police said they had been called to Fenton Crescent, Minto, following reports a person armed with a chain saw had entered a house.
Forensic officers set up a crime scene as detectives began interviewing both families at length.
Chainsaws are powerful cutting machines that can be powered by a two-stroke motor, electricity, compressed air or hydraulic power. They are used mostly for felling trees and lopping thick branches.
The cutting part of the oblong-shaped device consists of a chain with small sharp cutting teeth. Some specialised machines are used to cut through concrete.
Many companies insist that operators should be certified or licensed to work with chain saws.
The terror that chain saws can bring when used against people was emphasised in the 1974 movie The Texas Chain Saw Massacre - considered so horrific that it was banned in several countries.