During the months they were hiding at Bullock Creek, they were often visited by their friends including Steve Hart, Joe Byrne, Aaron Sherritt and the Lloyds. The police took the charge of attempted murder very seriously. A reward of £100 was offered for the capture of the two Kelly boys. The police thought the brothers were hiding in the Wombat Ranges. In October 1878, they sent two search groups out to find them. One group travelled south from Greta, and the other started from Mansfield and travelled north.
The Mansfield group was led by Sergeant Michael Kennedy, with three policemen; Constables Thomas McIntyre, Thomas Lonigan, and Michael Scanlon. They set up a camp at Stringybark Creek in a thick forest area. Kennedy and Scanlon went searching for the Kellys, while Lonigan and McIntyre remained at the camp. The Kellys were living in a hut close by at Bullock Creek. They heard noises and discovered the police camp. They decided to capture the policemen and take their guns and horses. Ned and Dan, and friends Joe Byrne and Steve Hart, went to the police camp and told them to surrender.
Constable McIntyre put his arms up, but Lonigan got out his gun. Ned Kelly shot him dead. When the other two police came back to camp, McIntyre told them to surrender. Scanlon went for his gun but Ned shot him dead. Kennedy ran shooting from tree to tree with Ned chasing him. During the shooting, Kennedy was shot and was badly wounded. Ned shot him in the chest to end his suffering. McIntyre was able to escape during the confusion. It was later reported in the newspapers that it was Dan who had shot Kennedy. Dan was wounded during the shooting.
The Victorian government passed a law on 30 October 1878, making the Kelly Gang outlaws; they no longer had any legal rights. They could be shot by anyone, at any time, without warning. Anyone who could capture one of the Gang, alive or dead, would be paid a reward of £500, or £2,000 for the four men. The bushrangers were seen at several places around north east Victoria. They had tried to cross the Murray River into New South Wales, but the water was too deep. The police had several large groups hunting for them. On 10 December, the Kelly Gang robbed the bank at Euroa. In February 1879, they went to Jerilderie, New South Wales. They locked the town's policemen in the police station cells, and kept many people prisoner in the Royal Mail Hotel for three days. Dan Kelly and Steve Hart kept the people in the hotel, while Ned Kelly and Joe Byrne robbed the bank. After the bank robberies, the reward was increased to £2,000 for each man, or the larger amount of £8,000 for the Gang.
Over the next 18 months many policemen were sent to north-east Victoria to search for the Kelly Gang. The police could not find the bushrangers because they were badly led and they did not know how to live in the bush. However the Kellys were experts in living in the bush and they had the support of the local people.
In June 1880, the Kelly Gang came out of hiding. They knew that Joe Byrne's friend, Aaron Sherritt, had been giving information to the police. Four policemen were living at Sherritt's house, near Beechworth, to protect him. Dan Kelly and Byrne went to Sherritt's house late at night and knocked on the door. When Sherritt opened the door, Byrne shot him dead. The policemen were hiding under the bed. Kelly and Byrne rode quickly back to Glenrowan where Ned Kelly and Hart had forced many of the town people into a hotel, the Glenrowan Inn. They also had forced railway workers to pull up the train tracks. They knew that more police would be sent by train to Beechworth to find them. They wanted the train to crash when it reached the place where tracks had been removed near Glenrowan. The bushrangers, wearing homemade armour, would then capture any of the policemen that were alive after the crash. With the police out of the way, the Kelly Gang would then go into Benalla and rob the bank. The captured police would be released when Ellen Kelly, William Williamson, and William Skillion, were let out of gaol.
The plan did not work because the four policemen did not come out of Sherritt's house until the next morning. This meant that the news of the murder did not reach Melbourne as quickly as the Kelly Gang had hoped. The people held prisoner in the hotel became restless. Ned organised music and Dan joined in dancing to keep the people in the hotel entertained. Dan also organised some sporting games including long jump and hop, step and jump. Dan wanted to leave Glenrowan when they knew the plan was not going to work because the train was late. Ned Kelly let Thomas Curnow, the school teacher, go home to his wife. Dan told his brother not to trust Curnow, and to keep him at the hotel. Instead of going home, Curnow went to the railway and about 3.00am he was able to stop the train before it reached the broken rails. The police quickly left the train and placed themselves around the hotel so that the Kelly Gang was trapped inside.
When the bushrangers heard the train pull into the station, they knew their plan to destroy the train had failed. They put on their suits of armour and went on to the verandah of the hotel to wait for the police. In the first few shots, police Superintendent Hare, Ned Kelly and Joe Byrne were wounded, and Jack Jones, son of the hotel owner was killed. Ned Kelly, who was dressed in his armour, was able to leave the hotel and kept shooting at the police. The police fired their guns into the hotel building for seven hours. It is estimated that 15,000 bullets were fired during the shooting. Byrne died after being shot in the groin. Ned Kelly went back to the hotel but could not find Dan or Steve Hart who were hiding in a back room. He again left and tried to find his horse. Ned Kelly was shot in the legs as he searched outside for his brother. The police were then easily able to capture him.
At 10.00am there was a large crowd of people watching the action. Police Inspector Sadleir was forced to stop the shooting to allow many of the hostages to escape. He would not let Dan's sister Maggie, or a Catholic priest Father Gibney, go into the hotel to tell the men to give themselves up. Instead, he ordered that a cannon be sent from Melbourne so that they could destroy the hotel.
At 2.30pm, the police set fire to the building to try and make the rest of the Kelly Gang leave the building. Father Gibney ignored the police and went into the burning building. He found Dan Kelly and Steve Hart dead in a back room of the hotel. He said their bodies were lying side by side, their heads resting on blankets. Byrne's body was dragged out of the hotel, but the bodies of Hart and Kelly were badly burned during the fire. People who saw the burned and blackened bodies were unable to tell which was Dan Kelly and which was Steve Hart. They were placed on sheets of bark from a tree and photographed. Three Glenrowan people held prisoner inside the hotel died during the siege.
Family members, including his sisters, Kate and Maggie, and friends took the bodies back to Greta. The police tried to get the bodies back, and sent a group of 16 policemen to Greta, but they became worried that this would start another fight and they went back to Benalla. Dan Kelly and Steve Hart were buried in unmarked graves at Greta, on 30 June 1880. About 100 people were at the funeral, with Dan's cousin, Tom Lloyd, as the undertaker, and a Greta farmer, Daniel O'Keefe, acting as a preacher. After the graves were filled in, the whole area was ploughed over to keep the site of the graves hidden. The family was worried that the police would still try to get the bodies.