Police are now treating the stabbing attack in Melbourne's Bourke St as a terrorist incident.

In a press conference Victoria Police Chief Commissioner Graham Ashton said the man who is alleged to have stabbed three people, killing one, was known to state and federal police.

Commissioner Ashton the man, who was from Somalia, was known to police "mainly in respect to relatives".

"He's got family associations that are well known to us," he said.

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There were some reports that the man yelled "Allahu Akbar" during the attack but Commissioner Ashton said this had not been confirmed.

The police chief confirmed the man, from Melbourne's north western suburbs, had died in hospital today in hospital after being shot in the chest by police.

He also confirmed there were barbecue-style gas cylinders in the car that was set on fire.

Three person were stabbed in the Melbourne CBD this afternoon and one person is dead, along with the knifeman.

According to the ABC, witnesses saw the man crash the car, get out and throw an object into the car that set it alight.

Footage captured the shocking scenes as a car went up in flames and police shot the knife-wielding man in the chest after he confronted officers as they arrived at the scene. He was taken to hospital under police guard in a critical condition, and according to the Herald Sun, has since died.

In a press conference, Victoria Police Superintendent David Clayton told reporters that one of the people stabbed had died at the scene. Another two victims have injuries to their upper body.

Police say they were called to the area about 4.10pm after receiving reports of a car on fire near the corner of Swanston St.

Supt Clayton told reporters that when officers got out of the car, they were confronted by a male brandishing a knife and threatening them.

"Passers-by were calling out that members of the public had been stabbed," he said.

He said there were no known links to terrorism at this time.

Video has emerged of a man lunging at police with what appears to be a knife before being shot.

One witness named Markel told ABC Local Radio in Melbourne that bystanders were urging officers to shot the man.

"A lot of bystanders (were) actually just screaming at the police officers, because the police officers were trying to take the knife off him and arrest him but bystanders were yelling out 'just shoot him, just shoot him'."

Vision appears to show the man lunging at officers and police trying to taser the man before they finally shoot him.

The area is currently in lockdown and people are being advised to stay away from the CBD if possible. Supt Clayton said the bomb response unit was making the area safe

In an earlier statement, Victoria Police said a man was arrested at the scene and taken to hospital in critical condition. He is under police guard.

"A small number of people are being treated for stab wounds," the statement said.

Ambulance Victoria said it assessed three people at the scene, who were then taken to hospital.

One had a neck injury and was in a suspected critical condition, a second person had a head injury; and the condition and injuries of the third person was unknown.

Police have urged anyone who witnessed the incident or had footage of what happened to contact them.

A burnt out car is seen in Bourke St on November 09, 2018 in Melbourne, Australia. A man has been shot by police after setting his car on fire and stabbing several people. Photo / Getty Images
A burnt out car is seen in Bourke St on November 09, 2018 in Melbourne, Australia. A man has been shot by police after setting his car on fire and stabbing several people. Photo / Getty Images

Footage on social media shows a blue ute up in flames and a man dressed in a black tunic and white pants menacing police with what appears to be a knife. Two bystanders try to help officers stop the man, one of them by rolling a shopping trolley in his path.

Markel Villasin, 22, was finishing his shift at KFC on Bourke St as the drama unfolded.

"Me and the managers ran out and that's when we saw the car on fire and then we saw the guy on the floor and we wanted to help, there were two blokes helping him out already, he was face down pools of blood around his face," he told AAP.

"I'm pretty sure he got stabbed in the face.

"I really wanted to help but I was in shock, I didn't know what to do.

"Because he was on his stomach, they turned him over to see if he's alright, he was still alive."

Bystander Drew Hair told AAP he was walking on Swanston Street when he heard an explosion.

The next thing he saw was a "big dude punching into the police car".

Mr Hair said the assailant was dressed in Islamic clothing and of African appearance and about six foot four inches tall.

"The cops were trying to hit him with batons and he wasn't going down," he said. Mr Hair said two civilians became involved as well as two police, trying to stop the man from his attack.

Melbourne resident Meegan May told news.com.au she was on a tram on Bourke St heading into the city when it stopped just before Elizabeth St, about a block before the mall. She heard someone start screaming "he's got a knife".

She looked through the back window of the tram and noticed a car on fire. There was a man and two police officers trying to calm him down.

"A moment later, I heard a loud bang; to me it sounded like a gunshot," she said.

An ambulance and about 10 police cars appeared within moments.

A man told Sky News that there seemed to be multiple explosions.

"There was one explosion and fire, then a second explosion and it was like a massive fireball," he said.

Reports on 3AW Radio indicate that witnesses saw the man driving the vehicle "throw something into the back", which then ignited.

An eyewitness speaking to 7 News said it appeared the car was on fire before it crashed and "exploded".

"I was walking up Bourke St … and we heard this loud explosion. I thought it was a car backfiring but there was flames coming out of the car. It then veered to the left … and exploded in flames," the woman said.

"People were running everywhere. I thought it was like what happened last year so I started running. Everyone started running. It was so scary."
The area has been cordoned off and the public are urged to avoid the area.

Police say they are not looking for anyone further at this early stage.

Anyone with information or who witnessed the incident is asked to go to Melbourne West police station to make a statement.

The incident comes as a trial into the 2017 rampage in Bourke Street continues.

In 2017, six people died in the terrifying car rampage that also left dozens injured.

Four adults, a child and a baby died after James "Dimitrious" Gargasoulas allegedly ploughed his car through the busy pedestrian mall on January 20.

Those killed were three-month-old Zachary Matthew-Bryant, Tahlia Hakin, 10, Yosuke Kanno, 25, Jessica Mudie, 23, and 33-year-olds Matthew Si and Bhavita Patel.

In September that year a knife-wielding man also went on a rampage outside Flinders St station. He was tasered and arrested in dramatic scenes in Melbourne's CBD.

In December, there was another incident when Saeed Noori allegedly drove a car into people crossing the intersection of Flinders and Elizabeth streets.

At least 18 people, including a four-year-old boy and international tourists, were hit by the car that afternoon and one of them, 83-year-old grandfather Antonio Crocaris, died about eight days later.