Five people managed to flee the central Sydney cafe where staff and customers were taken hostage on Monday morning.
The two latest to flee were both Lindt staff members, the ABC reported.
About an hour earlier, three other people escaped - two people through the front door and another through the fire exit.
New South Wales' police commissioner Andrew Scipione earlier said only one offender was involved. An Islamist flag was being held up in the cafe window, with terrified hostages cowering inside.
The flag read "There is no God but Allah" and "Mohammed is the messenger of God".
Earlier reports said up to 40 people - 10 staff and up to 30 customers - could be in the cafe but NSW deputy police commissioner Catherine Burn said it was nowhere near that number.
Seven News reporter Chris Reason has tweeted the lights in the cafe have gone off.
Seven News reporter Chris Reason can see into the cafe from his office and says all the hostages are huddled at one end of the cafe.
"When the 5 hostages escaped, the gunman could be seen from here getting extremely agitated, shouting at remaining hostages," Reason tweeted.
ABC says gunman is known to police but they have been asked not to identify him.
ABC report police have started adding more heavy barriers to blocks roads near siege site.
Channel 7 staff trapped in a building near the siege have told ABC they believe 15 people were in the Lindt shop before five escaped.
NSW deputy police commissioner Catherine Burn said the "situation" was contained to one area.
NSW deputy police commissioner Catherine Burn said the situation meant she could not provide too much information.
She would not clarify any operational tactics, including how the five people managed to leave the building.
Police had been in contact with the gunman through the day and were using negotiation techniques which were world class and proven, she said.
NSW deputy police commissioner Catherine Burn said the negotiation might take a bit of time but
they wanted to resolve the situation peacefully.
She said plans were being made for staff to work into the night.
NSW deputy police commissioner Catherine Burn said a negotiation process was under way with the hostage taker.
The five people who had escaped were being assessed to make sure their health was okay, she said.
British PM David Cameron said he was briefed overnight on the siege in Sydney.
"It's deeply concerning and my thoughts are with all those caught up in it."
Australian media outlets contacted by hostages report offender's demands include talking to PM Tony Abbott.
Police say they're continuing their efforts to bring about a "peaceful resolution" to the siege.
They say they can't give exact details but, as far as they know, no one has been injured.
Australian PM Tony Abbott said he had just chaired a meeting of the National Security Council.
He said the incident was "very disturbing" and lauded the police for their response.
Abbott thanked the people of Sydney for the calmness of their response and highlighted messages of support from a number of international leaders.
It had been a difficult and testing day but Australians had again risen to meet the challenge, he said.
ABC reporter Lucy Carter reported a number of arguments over racism in the crowd of spectators, with some drinking beer as they watched the siege unfold.
"We've had people taking selfies in front of the police line ... and people riding up on bikes and walking through police cordons," she said.
"I've seen some pretty poor behaviour from Sydneysiders today but some good behaviour as well."
Counter-terrorism expert Nick O'Brien told the ABC the current security climate had turned the Sydney incident into an event receiving worldwide attention.
"If this had just been a siege-hostage situation, then really it wouldn't have gone global, but because of that black flag and because of the terrorist implications ... this is going to be the top news story all around the world," he said.
"So that person has achieved what he wanted to do. I'm sure when he went into that cafe this morning, he had a plan and part of that plan was to get worldwide publicity for what he was about to do, and he succeeded."
Two more women have just left the Lindt Cafe. That takes the total number to escape to five, the ABC reports. Both were Lindt staff members.
Channel 9 News Australia said it had been contacted by two of the hostages.
They had been passed on to the police, and their family members contacted.
Australia's Grand Mufti, Professor Ibrahim Abu Mohamed, and the Australian National Imams Council have released a statement condemning the attack.
They say they want to reiterate that such actions are denounced in Islam.
"The Grand Mufti and the Muslim community express their full support and solidarity with the victims and their families and aspire to a peaceful resolve to this calamity."
Police say they are working with the released trio to learn more about the hostage taker.
Australia's National Security Committee, which includes PM Tony Abbott and Treasurer Joe Hockey is meeting, ABC reports.
NSW's deputy police commissioner Catherine Burn said she could not speculate on suggestions the man had an explosive belt.
NSW deputy police commissioner Catherine Burn said according to her information, there were nowhere near 40 people inside the cafe.
NSW deputy police commissioner Catherine Burn said she could not confirm how many people remained inside or how the trio had escaped.
Police negotiators had made contact with the suspect. She declined to speculate about the man's motivations.
NSW deputy police commissioner Catherine Burn, after confirming the trio had escaped, said there was no information to indicate anyone had been harmed.
The Guardian reported people seen running out of Lindt Cafe. Its website said one staff member and two customers had fled from cafe.
The ABC reported two people had left through the front door and another through the fire exit.
Opposition and Labor leader Bill Shorten said it was a "horrifying incident" and all of Australia was praying for and thinking of the hostages and their families.
It was at times like this that the Australian community had to stick together and be united, he said.
He had offered the Government its full support.
"We are one when it comes to maintaining the security of Australians."
Police have evacuated people from the building above the Lindt Cafe, including children in a day care centre, the ABC reports. The hostages remain in the cafe.
Police have also continued to "progressively" clear people from buildings near the site of the hostage drama.
Lindt Chocolate Cafe worker Catherine Chee was leaving for work when her mother called her back and said it was being held up.
"We (went) straight back to the TV of pictures of the hostages holding their hands against the window and straight away I recognised three of my colleagues against the window, one of which was holding the flag," she told the ABC.
Australian Treasurer Joe Hockey, ahead of a major budget update this afternoon, said Australians could not allow such events to change their way of life.
Eyewitness Josh Acton told the ABC he was stuck in a building opposite the chocolate shop, and that there were 80 people stuck on his floor alone.
Mr Acton said everyone was on tenterhooks and watching the rolling news coverage online. They had all received messages of support from family and friends.
Lindt Chocolate Cafe Australia has released a statement saying it has closed the rest of their Australian branches due to the siege.
"We would like to thank everyone for their thoughts and kind support over the current situation at the Lindt Chocolate Café at Martin Place. We are deeply concerned over this serious incident and our thoughts and prayers are with the staff and customers involved and all their friends and families. The matter is being dealt with by the authorities and we are waiting for any updates from them."
India PM Narendra Modi tweets: "The incident in Sydney is disturbing. Such acts are inhuman & deeply unfortunate. I pray for everyone's safety.
Eye-witness Josh Acton told the ABC he was stuck in a building opposite the chocolate shop.
There were 80 people stuck on his floor alone.
Acton said everyone was on tenterhooks and watching the rolling news coverage online. They had all received messages of support from family and friends.
Queensland and Victorian premiers say there is no specific threat posed to residents in those states.
An ABC reporter at the scene said there were dozens of heavily armed police there, but nearly five hours into the siege it was hard to work out exactly what their tactical approach was.
Police have left the Sydney Opera House, which was sealed off earlier this afternoon. A police spokeswoman told The Guardian they were not responding to anything there.
NSW's police commissioner Andrew Scipione said police did not yet have direct contact with the armed offender.
Lindt CEO believes 10 staff and up to 30 customers are in the cafe.
NSW's police commissioner Andrew Scipione said he did not want to go into great detail around what the flag placed in the window stood for.
He also said he was not aware of any explosives devices being involved despite reports suggesting there were.
He said there had been a number of calls about explosive devices around the CBD but they had proven negative so far.
NSW's police commissioner Andrew Scipione said police had not spoken directly with the hostage taker yet.
He said they had moved to a footing which was consistent with a "terrorist event".
And, he said police were still trying to determine the motivation of the person involved but there was no link to terrorism raids carried out in the state earlier today..
NSW's police commissioner Andrew Scipione said the area had been evacuated because they wanted to do all they could to ensure people were not harmed.
The scene was "well-contained".
New South Wales' police commissioner Andrew Scipione told a news conference he could confirm there was one armed offender holding an unknown number of hostages.
Police were focused on the situation concluding peacefully, and the officers there were well-trained and professional.
At a news conference New South Wales' Premier Mike Baird said he had full confidence in the police commissioner and his force.
"We are being tested today in Sydney… whatever the test we will face it head on.
"We will get through this but, importantly now, our thoughts and prayers are with those caught up in the situation."
United States President Barack Obama had been briefed about the situation, a White House official said.
And Queensland's police commissioner Ian Stewart said he had information an improvised explosive device was involved.
Prime Minister Tony Abbott convened a national security meeting to deal with the "disturbing" developments, suggesting only one person was responsible for the Lindt cafe incident.
"We don't yet know the motivation of the perpetrator, we don't know whether this is politically motivated although obviously there are some indications that it could be," he said at a hastily-arranged media briefing.
"The whole point of politically motivated violence is to scare people out of being themselves.
"Australia is a peaceful, open, and generous society. Nothing should ever change that and that's why I would urge all Australians today to go about their business as usual," he added.
Reports said anywhere between a dozen and 50 people were in the Lindt cafe. AFP
Australian Prime Minister Tony Abbott has just addressed the nation:
"We don't know whether this is politically motivated," he said.
"We have to appreciate that even in a society such as ours, there are people who would wish to do us harm...the whole point is to scare people.
"Australia is a peaceful, open and generous society and nothing should ever change that.
"If anyone does have any suspicions, there is the national security hot-line, which I would urge them to call."
Image of one of the alleged hostage-takers is being shown in social media.
Police at Parliament House in Canberra increase car patrols, dog squads working grounds.
Police at Parliament House in Canberra have increased car patrols around the perimeter of the building, the ABC reports.
Dog squads are also working the grounds around Parliament. A car from the ACT's special response group has also been spotted driving around Parliament.
The police presence on the ground remains unchanged.
Lebanese Muslim Association president Samier Dandan said Australian Muslim leaders were meeting online now, to see if the community could help.
Mr Dandan said it was not known who was behind the siege and whether there were any links to the Australian Muslim community.
"But regardless, we have a hostage situation, whether he is someone who belongs to the Australian Muslim community or not, we are still waiting for information to be provided by police and based on that if there's something the Muslim community can do or assist we are there."
ABC reporter Ash Raper said more police officers had just arrived.
"We've just been moved out of the way because there's another lot of policemen moved in," he said.
"There's been about a dozen heavily armed police down the side of the cafe for almost an hour ... obviously assessing the situation ... they've just had more backup come in.
"They keep moving the public further and further away behind police tape."
Martin Place has been shut down and scores of police are surrounding the cafe. Martin Place train station has been cleared, and the Sydney Opera House has been evacuated.
AFP reported authorities were dealing with an "incident" at the opera house but did not elaborate on whether it was related to the siege.
Workers in buildings around Martin Place, including the Seven Network, have been ordered to evacuate the area.
ABC reporter Sarah Gerathy watched police arrive at the scene.
More riot squad police arrive at scene of martin place siege pic.twitter.com/UadwU0sbVC— Sarah Gerathy (@sarahgerathy) December 15, 2014
NSW government offices, including Premier Mike Baird's, are also in the vicinity.
Police have cordoned off the area to about 150m and a special police operations unit is outside the building.
Journalist Chris Kenny, who was in the shop about 20 minutes before the siege began, said he understood the automatic glass sliding doors had been disabled.
"I did speak to a couple of people who saw a bit more of this unfold than I did," he said.
"One woman said she tried to go into the shop just after I came out with my takeaway coffee but the doors wouldn't open.
"So obviously whoever is doing this has disabled the automatic glass sliding doors to stop anyone else going in and she said immediately she could see there was a weapon.
"She mentioned it being taken out of a blue bag and people were straight away asked to put up their hands."
Australian Prime Minister Tony Abbott, who in September raised the country's terror alert level to high, said Cabinet's National Security Committee had convened for briefings on the situation.
"This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner."
1/2 The incident in Martin Place is obviously deeply concerning but all Australians should be reassured...— Tony Abbott (@TonyAbbottMHR) December 15, 2014
Regular updates would be provided as they became available, he said.
East Bank Cafe owner Chris Dion told the ABC people coming into his business were "terrified".
"We've got the TV on here. Everybody is coming in to have a look and see what's going on in Martin Place. People just walking around not knowing what's happening," he said.
"I'm in disbelief to be honest, but we live in a beautiful country and this is happening right here in Sydney?
"Who could believe that's happening here?"