Police are investigating possible terror links to a siege in which police gunned down one man and found another dead in Melbourne's southeast.

A senior law enforcement figure told the Herald Sun the gunman was on parole for a criminal offence and rated as a low-risk figure of interest to counter-terror authorities.

Police shot dead a gunman, a second man was found dead in the foyer of an apartment building in Brighton and three cops sustained gunshot wounds in the bloody hostage drama.

The Herald Sun can confirm the gunmen is known to counter-terrorism police.

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A male caller to the Channel 7 newsroom in Melbourne said: "This is for IS" and "this is for Al-Qaeda." The station said a woman could be heard screaming in the background.

A Victoria Police statement confirmed police are investigating whether the incident is terrorism related.

Deputy Commissioner Andrew Crisp said police did not have any communication with the gunmen during the two hour seige.

The female hostage, understood to be between 20-30 years old, called triple zero and told officers that she was being held hostage and a man was dead.

Three male police officers suffered gunshot wounds when the gunmen opened fire on police.

Two officers were taken to hospital with non-life threatening injuries and another was treated at the scene.

Crisp said the identity of the gunmen was yet to be confirmed and police did not know whether the man and female hostage were known to each other.

"We're not sure of the relationship.

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"We're extremely concerned about terrorism, we're very attuned to the threat of terrorism
here in Melbourne," he said.

Crisp would not comment on the phone call made to Channel 7.

"We don't know who rang Channel 7, that's a line of inquiry."

The reason behind the incident remains unclear. The hostage-taker, who held a woman for hours at Buckingham Serviced Apartments in Brighton, was shot dead by police at 6pm.

The siege has now ended but a major police presence, including specialist tactical officers, remains at the scene, which is about 11km southeast of Melbourne CBD.

Neighbours reported hearing more than 20 gunshots in the area and police ordered everyone in the area to head to Coles supermarket.

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

The hostage drama was discussed on Monday night's Q&A series, with host Tony Jones asking the Minister for Social Services, Christian Porter, "Does the Government believe this was a terrorist incident?"

Witness Ben Vieth was standing on his balcony about 150 metres from the scene when gunfire erupted just after 6pm.

"Next minute we heard the machine gun go off," he said.

"It was absolutely terrifying. It went for probably three or four seconds - just constant fire.

"The police were just screaming at people to run and take cover.

"People were just ducking and running. I was just in shock - I couldn't stand up. It was full on.

"The noise was just deafening. It wasn't a couple of shots. It sounded like 20 or 30 shots."

As soon as the machine gun went off four ambulances sped to the scene, he said.

"They were obviously planned," Vieth said. "Then I just heard two police were shot."

Police were negotiating with a man in one of the apartments who had a female hostage with him.

Jack Reid, 20, who lives close to the apartment complex, was standing nearby with his 18-year-old brother when the shots started.

A police officer shouted at bystanders to flee to a nearby supermarket.

"The policewoman was just shouting at us to get into Coles and stay there," Reid said.

"It was pretty scary.

"She was just going: 'Everyone get into Coles now! Stay inside! Don't come out!

"We all figured it was a hostage thing.

"I am a bit shaken.

"The gunshots took us all by surprise.

"It went for at least three seconds. It sounded like a pistol or something."

Another witness told the Herald Sun police gunned down a man suspected to be holding a woman hostage.

Lee Griffin was working at a nearby dealership when he said tactical police hid behind local rubbish bins before firing.

Griffin said he heard two distinct rounds of gun fire.

"It was a clear sound. It sounded like a glock or pistol," he said.

"I heard an initial shot and then a wave of police arrived and that's when the next shots occurred.

"I saw police shot the guy. It was terrifying."

Local store owner Chi from Japanese canteen 'Cheeky Chi' said she heard a "deep sound" at about 5pm.

The shopowner described the gunfire as "duh-duh-duh-duh".

Chi had closed her shop at the time and did not see police.

Locals said they were rocked by an explosion around 4:30pm this afternoon at the apartment block and were evacuated shortly after.

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

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

The siege unfolded at Buckingham Serviced Apartments at 408 Bay St, which are next to a children's swimming school and several doctors offices.

The apartments advertised as "luxury" apartments with private balconies and "spacious and modern decor."

One bedroom apartments cost around $130 per night.

The apartments are directly opposite the Brighton swim school which is a popular children's swimming lesson venue in the area.

Firbank Grammar School and Brighton Grammar school are within walking distance of the scene and school children could be seen nearby in the aftermath of the seige.

Witness Courtney Ardern said 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.

This article originally appeared on the Herald Sun