Three people have escaped from a Sydney cafe where it is feared there are dozens of others being held hostage.
One employee and two members of the public were seen running from the besieged Lindt chocolate shop and cafe where at least one gunman has reportedly taken up to 40 hostages.
Australian police said negotiators have been in contact with the "armed offender" - but refused to speculate on his possible motivation.
The hostage situation has been unfolding in Martin Place - home to the Reserve Bank of Australia, commercial banks and close to the New South Wales state parliament.
It has been closed off and up to 100 heavily armed police are surrounding the area.
Earlier, live television footage showed patrons inside the cafe standing with their hands pressed against the windows.
A black flag with white Arabic text, similar to those used by Islamic State fighters in Iraq and Syria, was also visible.
According to reports, at least one gunman walked into the cafe just before 10am local time.
Witnesses reported hearing loud bangs which sounded like gunshots and that he was using a young woman "as a shield" inside the cafe.
A Lindt executive said there were about 10 staff and "probably 30 customers" in the cafe before the siege unfolded.
Sydney Opera House has been evacuated after a suspicious package was reportedly found not long after the police operation in the financial district began.
New South Wales police confirmed authorities were dealing with an "incident" there, but it is not known whether they are linking it to events at the cafe.
Prime Minister Tony Abbott said he has convened the National Security Committee for emergency briefings following the "hostage-taking situation".
"This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner," he said.
Mr Abbott said he did not yet know the motivation of those holding the hostages, adding: "Our thoughts and prayers must above all go out to the individuals who are caught up in this.
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Gallery: Latest Images From Australia
Hostages have been taken inside a chocolate shop and cafe in central Sydney
Streets in the area were closed and offices evacuated, with the public told to stay away
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