Terrorism is being investigated as "one line of inquiry" in a deadly siege in Melbourne overnight, as Islamic State claims responsibility for the attack.
Police shot dead a man at an apartment block in the bayside suburb of Brighton shortly before 6pm on Monday, bringing to an end a hostage situation where a woman was held against her will and another man was found dead.
Islamic State has now claimed responsibility for the attack on Tuesday morning (AEST), blaming the attack on Australia's involvement in the US-led coalition against Islamic State in the Middle East.
"The attack in Melbourne, Australia was carried out by a soldier of the Islamic State in response to the call for targeting the subjects of the coalition states," the Islamic State-affiliated news agency, Amaq, said.
Speaking to media at the scene, Victoria Police Deputy Commissioner Andrew Crisp said police had initially responded to reports of an explosion about 4pm but police now believe what people had heard was gun fire.
When police arrived at the Buckingham Serviced Apartments in Bay Street, Brighton, officers found a man's body in the foyer.
Victoria Police confirmed in a statement just before 7pm that the siege came to a conclusion with officers shooting a man dead after he opened fire.
"Three police members have sustained non-life threatening injuries during the arrest -- two have been taken to hospital and one was treated on scene," police said.
"Another man was earlier located deceased with a gunshot wound in the lobby of the serviced apartment building just after 4pm."
The woman who was taken hostage was "safely rescued", according to Victoria Police.