Several people have been taken hostage by at least one armed man at a Lindt cafe in the centre of Sydney.
Hundreds of armed police have sealed off the normally busy Martin Place in Sydney’s central business district.
Pictures on Australian television have shown at least three people with their hands up against a window, and a black flag with Arabic writing.
Australian Prime Minister Tony Abbott has described the incident as “deeply concerning”.
He said it was not yet clear who was behind the incident or what their motives were, but said law enforcement agencies were well-equipped to respond.
In a brief news conference, he said the National Security Committee had been briefed, and urged Australians to go about their lives but to be alert.
“I can think of almost nothing more distressing, more terrifying than to be caught up in such a situation, and our hearts go out to these people,” he said.
Martin Place is a public pedestrian thoroughfare through the heart of Sydney, joining its parliamentary, legal and retail districts.
It is full of media, members of the public and the police, with what appear to be anxious colleagues of people trapped inside the building, waiting for news. Several surrounding blocks are cordoned off.
Police are at this stage not giving media briefings at the site – dozens of police cars have arrived at the scene, with more continuing to come.