The man accused of mowing down pedestrians outside Flinders Street Station has been diagnosed with paranoid schizophrenia but must undergo more psychiatric testing to determine if he can argue he was mentally impaired at the time.

A recent assessment stopped short of declaring Saeed Noori could plead not guilty by way of mental impairment, Melbourne Magistrates Court heard on Tuesday, but his lawyer said the question was still "a live issue" requiring more testing.

Saeed Noori is to face court again in September. Credit:Seven News Melbourne

Prosecutors allege Mr Noori, 33, deliberately drove a car into people crossing the intersection of Flinders and Elizabeth streets on December 21 last year.

At least 18 people, including a four-year-old boy and international tourists, were hit by the car that afternoon and one of them, 83-year-old grandfather Antonio Crocaris, died about eight days later.