A man and a woman have been taken to hospital after being shot by police while attending a swingers costume party at a nightclub in Melbourne's CBD.

Police said they received reports a 35-year-old man was armed with a gun in an upstairs room during a Saints and Sinners "erotic fancy dress" Ball at Inflation nightclub on King Street shortly after 3:00am.

Critical Incident Response Team officers said they tried to talk to the man when they arrived, but he pulled out what they thought was a handgun from his pants and aimed it at police.

The man was then shot in the torso by police.

A woman also suffered a gunshot wound to the leg.

Superintendent Lisa Hardeman said venue security were told earlier in the night the gun was fake, and that information was given to police.

"But when the firearm was levelled at police, and police asked the man to drop it and he didn't, police at that stage were not aware whether it was an imitation or a firearm," she said.

"The woman was in close proximity to the male and police as they opened fire, she was also injured."

The shooting happened at Inflation nightclub in King Street during a costume party. ( ABC News: Patrick Rocca )

Police yet to confirm if gun was a fake

Superintendent Hardeman said police were still investigating whether the gun was an imitation.

"The firearm is in the contained scene which is being processed by our forensic people," she said.

She said the shooting occurred on the first floor of the nightclub where there were about 10 people. About 100 people were at the venue at the time of the shooting.

The man was taken to the Royal Melbourne Hospital in a critical condition. Police later said his injuries were not life-threatening.

The woman was taken to the Alfred Hospital with non-life-threatening injuries. The two were known to each other.

Police said the investigation would be overseen by Professional Standards Command, which is standard protocol in a police shooting.

The number of shots police fired is not known but will be investigated, Superintendent Hardeman said.

She said officers would be given support after the shooting.

"If you look at all the circumstances when a gun is aimed at you, and you ask somebody to drop the gun and that does not occur, you need to make a split-second decision to protect yourself," she said.

"Police don't come to work to shoot people, they come to work to do their job."

The man and woman were taken to hospital and have non-life threatening injuries. ( ABC News )

Police 'over-reacted', nightclub owner says

Nightclub owner Martha Tsamis said in a statement police had "overreacted" to the report, which she claimed was made anonymously.

She said security staff were not concerned by the man.

"Security verified that a plastic toy accessory was displayed to, and passed by security and this information was given to police on arrival," she said.

"Staff and security have vehemently stated that at no time did they make a call to police for assistance, or indeed, saw the need to.

"Security had no concerns prior to the incident, and advised police on attendance that they were more than happy to deal with any issues."

Ms Tsamis also contradicted the police's account that the man aimed a gun at officers, and said "rather he was in a compromising position with his female partner".

"Obviously, this matter will require further investigation but on the evidence available to us, police have overreacted to an anonymous phone call, ignored the advice of security who did not believe there was [an] incident that required anything more than clarification."

"As a consequence, two innocent members of the public innocently enjoying each other's company have suffered serious gunshot injuries and it is extremely fortunate that there no fatalities."

Ms Tsamis said outfits and accessories of patrons are checked by security as a condition of entry into the venue.

She said in a separate incident the nightclub last week lodged a complaint against police over a drug search.