A man shot by police after stabbing three people in Melbourne's Bourke Street has died in hospital.
One of the stabbing victims died at the scene while two are in hospital.
Police shot the man in the chest after he charged at them with the knife.
He was taken to hospital in a critical condition and kept under guard before succumbing to his injuries.
Victoria Police Chief Commissioner Graham Ashton told a press conference the attack was being treated as an act of terrorism.
"From what we know of that individual, we are treating this as a terrorism incident."
He said the attacker, 31, was known to "federal intelligence authorities" as well as to Victoria Police.
"He's known to police mainly in respect to relatives he has that are certainly persons of interest to us.
"For operational matters we now have the counter-terrorism command and the homicide squad dealing with this matter, and there are ongoing investigations being conducted by the counter-terrorism command," he said.
Mr Ashton said the attacker had a criminal history of cannabis use, theft and driving offences.
Mr Ashton said police did not believe there were any ongoing threats, but were conducting "security reassessments" in relation to several events in Melbourne scheduled for the weekend, including Stakes Day horse racing at Flemington, an A-League football match between Melbourne Victory and Central Coast Mariners on Sunday, and Remembrance Day events.
"At this stage we're still encouraging people to go to those events, and it's highly likely we'll have additional police at all of those events," he said.
Video taken by witnesses shows a car on fire in the area and bystanders using a shopping trolley and chair to confront the attacker.
The video shows the man attempting to slash police officers with a large knife before falling to the ground.
Victoria Police said a bomb response unit had been called to the area and was currently making the scene safe.
Chaos in #bourkest as a guy seems to have set his car on fire then attacked police with a knife. Police response was swift and overwhelming. I heard at least one gunshot initially. pic.twitter.com/j5BB8VVehI— Meegan May (@meegslouise) November 9, 2018
Victoria Police Superintendent David Clayton said when police arrived at the scene they were confronted by a man brandishing a knife and threatening them.
"At the same time, passers-by were calling out that members of the public had been stabbed.
"Police shot the male in the chest and he is now in a critical condition in hospital," Superintendent Clayton said, adding the officers are okay."
In a later statement, police said the man assaulted police, fled on foot, then was shot while lunging at police with the knife.
Officers said they were initially called to a car fire around 4:20pm (AEDT).
The Metropolitan Fire Brigade said the fire was contained within 10 minutes.
An eyewitness said after the car burst into flames, someone walked up to the alleged driver and was stabbed directly in the chest.
A caller to ABC Radio Melbourne, Meegan, said she saw the incident from a tram.
She said she saw two policemen trying to subdue a man as a car burned.
"He seemed to be waving something, people around me screamed that he had a knife, but I couldn't see clearly from where I was," she said.
"And then I heard one loud bang. It sounded like a gunshot.
"And someone said they could see someone doing chest compressions on someone as an ambulance started coming up the street."
Another witness, Markel, told ABC Radio Melbourne he ran out of the store he was working in after hearing there was a fire and found himself next to an injured man.
"Turned out there was an old man in front of me, literally by my feet. He was face down, face down, and there was a lot of blood," he said.
"I was already stepping on his blood.
"There was a lot of bystanders trying to help him out. They didn't know what to do because obviously in that situation it is pretty crazy."
Markel said bystanders were yelling out "just shoot him, just shoot him," while police officers were trying to disarm the attacker.
Police are asking members of the public to avoid the area.
"Anyone with information or who witnessed the incident is asked to go to Melbourne West Police Station to make a statement," a police statement said.
Trams are not running along Bourke Street or Swanston Street in either direction.
Thank you to the @VictoriaPolice officers who responded so bravely, and the every day Victorians who came to the aid of complete strangers. Please continue to avoid the area. Anyone with information should attend Melbourne West Police Station to make a statement.— Daniel Andrews (@DanielAndrewsMP) November 9, 2018
Premier Daniel Andrews tweeted, urging people to avoid the area and follow the instructions of emergency services personnel.
Opposition Leader Matthew Guy tweeted:
"Today, more than ever, we offer our thanks to Police and first responders for the unbelievable work they do for all of us."