A alleged gunman who holed himself and two female hostages up inside a cafe for almost nine hours has been arrested.

The siege in Rye, on the Mornington Peninsula south of Melbourne ended just before 4pm and the two women have been released.

Police said the man, 69, took his former partner, 45, hostage. The relationship between the pair is said to have ended a few weeks ago.

The second hostage was a worker at the cafe, a woman aged 42.

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An eight hour siege took place in Rye, in Victoria on Saturday. Nearby cafe Freaky Tiki posted this image of police captured on their CCTV cameras

The area has been blocked off since about 745am when police arrived on the scene

The two hostages were released unharmed and have been taken to hospital for observation.

'No-one's been injured which is a great result as far as we're concerned,' Superintendent Glen Weir said, according to the ABC.

'The skill of the negotiators and our tactical operators has been shown to be successful ... even though it takes a long time and it's disruptive to the traffic and the local area in the start of the busy summer season.'

The area around the shop - which is located on the corner of Point Nepean Road and Ozone Street - had been cordoned off since about 745am.

Police said early on the incident was not believed to be terror-related, and they believe that all the parties inside are known to one another.

Sue Rowe, from Rowees cafe, less than 100 metres from where the siege is took place, earlier said she believed one of the hostages may be the former partner of the gunman.

'He's always at the cafe - visiting or having coffee,' she told Daily Mail Australia.

Mrs Rowe said the main street which is usually bustling on a Saturday morning is like a ghost town.

'Everything has been blocked off in the street... there's nobody around except for police and ambulance.'

What should be a busy summer hot-spot was turned into a ghost town when the operation was underway

Multiple cafe owners in the area told Daily Mail Australia they believe one of the hostages may be the gunman's former partner

Police were at the Mornington Peninsula suburb, south of Melbourne since before 8am

Anton Vigenser from Freaky Tiki cafe - also nearby - said he had already opened his cafe for the day when the siege began.

'We all opened before-hand and sort of 15 minutes before the police got there the community kind of kept everyone at bay and aware,' he told Daily Mail Australia.

'It's concerning - we're all pretty close here in Rye.'

He said his cafe was evacuated and he had to be escorted back in by a 'very heavily armed officer' to turn off the ovens.

The 'close-knit community' are concerned for the hostages' welfare, they earlier said

Negotiations between police and the gunman were underway for hours at the scene

Mr Vigenser said one of the women he believed was being held hostage is 'lovely' and he sees her often in the close-knit community.

What should be a bustling December weekend has left the streets and shops deserted.

'All of us were gearing up for a huge day, all the cafes and businesses nearby,' he said.

'There's schoolies down, there's family getting down before Christmas, it would all be happening but at the moment it's all really tense,' Mr Vigenser added.