A Palestinian community leader in Sydney believes he knows the identity of the hostage taker and fears the hostages are in real danger.
Up to 40 people are being held hostage by a single offender in the Lindt Chocolat Cafe in Martin Place in Sydney's central business district. The saga unfolded mid morning local time and police are yet to establish contact with the man.
Jamal Daoud told Checkpoint he believed the man was one of many extremists who had attacked him and other community members during the past two years.
He said despite authorities initially calling the incident a hostage situation, it was a terrorist attack.
"I understand that the government and the authorities don't want to alarm people," he said.
"They don't want people to panic during this delicate time but this has one interpretation - it's a terrorist attack."
Mr Daoud said the flag that the man was displaying was in support of the jihadist group, Jabhat al Nusra, which was fighting the Assad government in Syria.
The attack was a publicity stunt to highlight many issues, including support for Jabhat al Nusra in the community and that the recent government crackdown will not weaken them, he said.
"These people are very dangerous and the situation is very dangerous," he said.
"I warned about this in the last few weeks, in the last few months."
Mr Daoud did not believe the man was a suicide bomber but said taking hostages in Sydney showed he may be suicidal.
2GB reporter Beau Mitchem told Radio New Zealand the faces of the hostages were "painted with fear".
"They've been ordered to stand against the windows with their arms up, some forced to wave a black and white militant flag," he said.
The gunman had warned negotiators he had control of four devices across Sydney.
"One of those is meant to be ... at the Opera House," he said.
"It's understood he's also demanding to speak to the Australian Prime Minister, Tony Abbott, live on radio.
The area around the Opera House was usually packed but hundreds of tourists had been pushed back.
"Most are bemused, clearly unaware of what is unfolding just hundreds of metres away up at Martin Place, and continue to take photos, Mr Mitchem said.
The siege had forced the CBD into lockdown and a "terrifying" situation was unfolding in Sydney, he said.
New Zealand Prime Minister John Key said the New Zealand Government was closely monitoring the situation.
Mr Key contacted his Australian counterpart, Tony Abbott, shortly after the siege began to offer a message of support.
He said his heart went out to those involved and his thoughts were very much with them and their families.
There had been no confirmation of the nationalities of those caught up in the incident.
A Ministry of Foreign Affairs and Trade spokesperson said it did not know whether any New Zealanders were among the hostages and urged New Zealanders in central Sydney to keep family in New Zealand informed of their well-being.