It was at 4.30pm on Monday when reports came through an affluent beachside suburb of Melbourne had been rocked by an explosion and a hostage situation was unfolding.

Police raced to serviced apartments on Bay Street, Brighton, in the city's south-east, and found the dead body of a male employee lying on the foyer floor.

'The Buckingham' was immediately placed into lockdown and the area outside the building was cordoned off by officers.

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Somalian-born Yacqub Khayre, 29, (pictured) was killed by police in an exchange of 'severe gunfire' shortly before 6pm Monday, ending the hostage situation inside 'The Buckingham' apartments, in Brighton, Melbourne

Specialist police at the scene of an explosion and hostage situation at the serviced apartments in Brighton, Melbourne's south-east after reports first came through at 4.30pm

'Severe gunfire' was heard ringing out from inside the apartment block at 6pm, with police exchanging up to 40 shots with the gunman, killing him in the process

Police are pictured at the scene in Bay Street, Brighton, where a gunman who had taken a woman hostage was shot dead

Police at 8pm confirmed they are now investigating the link of terror to the attack

At 5pm, specialist police were on scene and the Nepean Highway and Bay Streets were closed to peak-hour traffic.

It was revealed a gunman, Somalian-born Yacqub Khayre, 29, had taken a woman, a employee of the apartments believed to be aged in her 20s, hostage inside the building after a phone called was made to 000.

At 5.40pm, the gunman had called up the Melbourne newsroom of Channel Seven to claim: 'This is for IS, this is for al-Qaeda'.

As he made the chilling phone call a woman, believed to be the female hostage, was heard screaming desperately in the background.

The area outside the building was cordoned off and the Nepean Highway and Bay Streets were closed to traffic

When police arrived at the scene they discovered a man's body lying on the floor of the foyer, while another man was reportedly holding a woman hostage inside

A TIMELINE OF THE MELBOURNE SIEGE: 4.30pm - Reports of an explosion in a service apartment block in Brighton, in Melbourne's eastern suburbs - Police enter 'The Buckingham' to find a man's dead body on the foyer floor - The building is placed into lockdown and the area outside is cordoned off 5pm - Specialist police units can be seen outside 'The Buckingham' - The Nepean Highway and Bay Streets are closed, disrupting peak hour traffic - It is revealed a gunman is holding a woman hostage inside the apartments 5.40pm - The gunman calls Channel Seven newsroom and claims 'This is for IS, this is for al-Qaeda' 6pm - 'Severe gunfire' is heard ringing out from inside the apartment block - Police exchange up to 40 shots with the gunman, killing him in the process - He had reportedly stepped out of an apartment and began firing at police, leading to them returning fire - Terrified residents in the area forced to run for their lives into a nearby Coles supermarket 8pm - Police confirm they are looking into terror links to the attack Advertisement

At 6pm, 'severe gunfire' was heard ringing out from inside the apartment block, with police exchanging up to 40 shots with the gunman, killing him in the process.

The man had reportedly stepped out of an apartment and began firing at police, leading to them returning fire.

Three police officers were injured.

Terrified residents in the area were forced to run for their lives into a nearby Coles supermarket.

Sky News Melbourne bureau chief Ahron Young was reporting from the scene when he was forced to run for his life after police and a gunman fired on each other.

'I'm right now hearing gunfire, oh my god, police are calling for us to get back... we're all running away from here,' he said.

'We've just been told to get back to Coles because of this scene unfolding. There were probably 30 to 40 rounds of gunfire.'

The gunman responsible for the act was reportedly well known to counter terrorism officers in Victoria.

At 8pm, police confirmed they are now investigating the link of terror to the attack.