Islamic State is claiming responsibility for the Melbourne hostage attack.
"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 group's Amaq news agency said.
IS blamed the attack on Australia's membership in the US-led coalition against the militant group.
The gunman at the centre of the deadly situation that is being investigated for terror links was reportedly known to police over the Holsworthy terror plot.
The Seven Network took a phone call in its Melbourne newsroom at 5.41pm from a woman who said she was in a hostage situation before man came on the line saying "This is for IS, this is for al-Qaeda".
Deputy Commissioner Andrew Crisp told reporters on Monday night terrorism was "one line of inquiry" but it was still early days.
Victorian Premier Daniel Andrews and police Chief Commissioner Graham Ashton will hold a press conference at 8.30am on Tuesday to address fears of a terror link.
Islamic State is claiming responsibility for the Melbourne hostage attack. Source: 7 News
Victoria Police are yet to publicly identify the man, who was shot dead in a shootout with police at the Brighton scene on Monday night.
But sources told the Herald Sun he was rated as "a low-risk person of interest" by anti-terror police.
The man was acquitted over the terror plot to launch a suicide attack against Sydney's Holsworthy army barracks in 2009 after a trial in 2010.
In 2007, he was charged with armed robbery after holding up passengers on a Melbourne train, leaving one man with knife wounds.
Police were called to the Brighton serviced apartment building at 5.41pm on Monday to reports of an explosion.
When they arrived, they found a man apparently shot dead in the foyer.
They began efforts to negotiate with the gunman who was holding a woman hostage in one of the apartments.
Mr Crisp said the man spoken to by negotiators inside the building came out about 6pm and opened fire, hitting three police.
They returned fire and killed him.
Two male officers were taken to hospital for treatment while another was treated at the scene.
"We are extremely concerned about terrorism. Whenever there is any incident overseas it causes us to question what major events we have running ... we are very attuned to the threat of terrorism here in Melbourne," he said.