Police say terrorism is "one line of investigation" after the Melbourne hostage situation earlier this evening.

The counter-terrorism unit is involved in investigating whether the siege was a terror incident, after a man called a local newsroom saying "This is for IS. This is for al Qaeda".

The hostage-taker was shot dead by police in the Bay Street apartment complex at Brighton shortly before 6pm local time.

Police have safely rescued a woman who was being held against her will in the apartment block.

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The woman is "safe and well" with police investigators now, police said.

They are still working to confirm whether she knew the man who took her hostage.

Police have not confirmed the identity of the hostage-taker.

7 News reporter Paul Dowsley said the newsroom had received a phone call during the siege, with a woman heard screaming in the background.

"A male caller told a 7 News employee 'This is for IS. This is for al Qaeda'," he said.

Police believe the call came from within the Buckingham apartments and are investigating whether the incident was an act of terrorism.

Victoria police deputy commissioner Andrew Crisp said police were first called to reports of loud bangs around 4pm.

After they arrived at the apartments a woman called 000 saying there was a hostage situation and a man had died, Crisp said.

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Three male police officers were shot. Two have been taken to hospital and one has been treated at the scene.

Another man was earlier found dead with a gunshot wound in the lobby of the serviced apartment building just after 4pm.

Journalists asked Crisp to confirm reports that the gunman was known to counter-terrorism officials.

Crisp said in response that the man had not been identified by police.

Roads will remain closed in the area for some time.

Earlier, there were reports of more than 30 gunshots from semi-automatic weapons and police ordered everyone in the area to head to Coles supermarket where they were put into lockdown.

Sky News is reporting that the hostage situation has been "resolved" but two police officers are believed to have been shot.

The first police on the scene arrived to find a body in the foyer of the Bay St apartment block.

He is believed to have been shot.

Police had been trying negotiate with a man in one of the apartments who has a female hostage with him.

The area had been cordoned off by heavily armed specialist officers with locals warned to stay away.

The siege unfolded at Buckingham serviced Apartments.

Witnesses told of being rocked by an explosion around 4:30pm this afternoon at serviced apartments on Bay St near the Nepean Highway and were evacuated shortly after.

The apartments are next to a children's swimming school and several doctors offices.

The busy shopping strip had been blocked off and police are diverting traffic away from the area.

A Sky News reporter on the scene said he had heard 30-40 rounds of gunfire and police are telling people to get back from the scene.

Ambulances and additional police arrived at the scene, the reporter, Ahron Young, told Sky News.

Over 100 people were herded into the Coles supermarket, around 100m away from the apartments.

The incident began unfolding around 4.30pm when hotel visitors told Young they were reported by a massive explosion that rattled the walls.

Young said all the nearby streets have been blocked off while a steady stream of emergency vehicles arrive.

Witness Courtney Ardern told news.com.au she was inside Brighton Spinal Group on Bay St when police ordered everyone to evacuate at about 5.15pm.

"There are helicopters flying round and a carpark full of police, including a van with armed police," Ardern said.

"I also overheard someone saying they were evacuating an entire building nearby."

Ardern said the area was swamped with police and the road had been blocked off.

Antonia Waite, who lives off Bay Street, told the Melbourne Age her daughter was in the front yard when police, armed with "big guns", told her to "go inside and lock the doors".

Callers to a local radio station said they heard an explosion or loud bang like a gun shot.

Undercover armed police with bulletproof vests were also seen running up the street.

Police had arrested one person and who was handcuffed at a bus stop. Another caller saw police officers on their hands and knees with guns drawn at the entrance to the apartment block, the Age reported.