Citing diplomatic sources, Israel Radio said the envoy was believed to have attempted suicide, distraught at the discovery he had malignant cancer. He was airlifted to Israel in critical condition, officials said.
"There was no indication that other parties were involved in the injuries suffered by the ambassador," Ethiopian police said in a statement read on state-run television.
Security guards heard the shot and found Grossman in his room at the Addis Ababa Hilton, bleeding from his head with his gun lying nearby.
An Israeli security source said the shooting, which left Grossman in critical condition, "appeared to have a personal background".
A spokesman for Israel's Foreign Ministry said a team was being sent to Ethiopia "to check the circumstances of the event".
Both Ethiopia and Israel earlier had said there was no evidence of terrorism.
A doctor involved in the ambassador's treatment at Addis Ababa's Hayat hospital said Grossman had been in intensive care, in a room guarded by security officers.
"I am afraid it is very critical and could be a very serious one," said the doctor, who declined to give his name.
Grossman, 48, had served in the post since 2002 and was due to leave shortly to become Israel's ambassador in South Africa.