One person has been killed and at least two others injured after a dramatic incident on Bourke Street.
Video shot from the scene showed the frenzied attack that carried on for more than a minute, beginning with the attacker charging at two police officers and slashing at them with a knife.
One of them has succumbed to injuries, police said.
Photo from the scene showed crowds of people behind police barriers. Condition not yet known.
Victoria Police responded to a major incident on Friday afternoon on Bourke Street in Melbourne, Australia.
The incident took place at Bourke Street as reported by Victoria Police.
The suspect has been shot and is alive, police say.
Superintendent David Clayton told reporters at a media conference that police were called to reports of a vehicle fire and were "confronted by a man brandishing a knife and threatening them".
The Victoria Police took to Twitter to update on the situation.
'The exact circumstances are yet to be determined at this stage. The journalist also said an emergency speaker system was warning people to avoid the area.
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Police are not looking for anyone further at this early stage.
Witness Fiona told 3AW her friends had seen someone with a knife in the area and she'd been told he'd stabbed a security guard.
The chaos started when 3AW was flooded with calls from people at the scene who had witnessed a vehicle "bursting into flames" just after 4pm on Friday.
Witnesses described a chaotic scene with an injured pedestrian lying on the ground, and numerous police cars and helicopters flying overhead. They said they heard screams and cries from the crowd before they were rushed from the area.
'Police response was swift and overwhelming.
Markel Villasin, 22, was finishing his shift at KFC on Bourke St as the drama unfolded.
"I really wanted to help but I was in shock, I didn't know what to do".
"Then I heard a loud bang and someone said they could see someone doing chest compressions on someone as an ambulance started coming up the street as well".
The apparent attack came as a 28-year-old James Gargasoulas underwent trial in Melbourne for driving into a crowd in the same area in 2017, killing six people.