A man remains under police guard in hospital after an overnight siege in a central Melbourne restaurant.

The disgruntled former employee of Ludlow Bar and Dining held a woman hostage in the Southbank restaurant for almost eight hours while armed with a knife.

Negotiators convinced him to let her go at 5.30am on Monday and the man was then tasered and arrested.

The 35-year-old man was wheeled out of the restaurant on a stretcher and taken to St Vincent's Hospital, where he remains under police guard.

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Police are yet to interview him, but Inspector Travis McCarthy said he believed the man had been working at the restaurant until recently.

"At this stage it's really the subject of an ongoing investigation but he's disgruntled about some employment issues with the restaurant," he told reporters.

He said it appeared the female staff member just happened to be rostered on at the time.

"There is nothing to indicate that any direct threats were made to her," he said.

But he added it would have been traumatic for her to be held hostage over such a long period time.

The woman, from Port Melbourne, was assessed by paramedics at the scene.

Staff and customers fled and called police when the man entered the restaurant carrying the weapon at 10pm on Sunday.

He made his way to a back store room where the 27-year-old staff member was and barricaded himself inside with her.

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Police cleared the area and negotiated throughout the night to try to get the man to surrender.

A former Ludlow restaurant manager named Storm, also a close friend of the hostage, said she was in "utter shock" after hearing what had happened.

Sunday nights were usually pretty quiet at the restaurant, she said.

"She's a very strong woman, so hopefully she'll be coping alright," Storm told Fairfax radio.

"Nobody could imagine what it's like to be in a situation like that."

Storm said the incident would shake Melbourne's hospitality industry.

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"I think this has changed everything for a lot of staff, at all of the venues in Melbourne," she said.


- AAP