A man has been shot dead by armed police on a busy south London high street following a terrorist-related incident in which a number of people are believed to have been stabbed.

Witnesses said they saw a man with silver canisters strapped to his chest and holding a ‘machete’ being chased by armed plainclothes officers down Streatham High Road before being shot.

The attacker was under active surveillance, implying he was considered to post a serious risk, and was well known to the counter-terror authorities, the Guardian understands. He was also the subject of a live investigation.

One man and two women were injured, according to initial reports, with police confirming that one was in a life-threatening condition. Scotland Yard said a second victim had minor injuries while a third’s condition was described as “not life-threatening”. All three were treated at the scene and then taken to hospital.

While the investigation is at an early stage it is believed that the suspect was motivated by an Islamist terrorist ideology.

The Metropolitan police confirmed the man, who was shot at about 2pm, had been pronounced dead and added that the scene had been “fully contained”.

The man shot dead by police was wearing a “fake suicide vest” made of objects designed to look like an improvised explosive device. A similar vest was worn by attackers during the London Bridge attack in 2017 and the later London Bridge attack in November 2019.

An earlier tweet from the force said: “A man has been shot by armed officers in Streatham. At this stage it is believed a number of people have been stabbed. The circumstances are being assessed; the incident has been declared as terrorist-related”.

Witnesses on social media said they had heard three gunshots. It is not known how many people were stabbed. Images posted online show a person face down on the ground outside a Boots chemist.

Facebook Twitter Pinterest Police vehicles on Streatham High Road. Photograph: Andy Bullemor/SWNS.COM

As footage emerged on social media of armed police approaching the prone figure on the pavement, police cordoned off the street and advised people to avoid the area. Some local residents were asked to leave their flats. Eyewitnesses said that the officers were in plain clothes.

One witness said he had seen the shooting in front of a Boots store on Streatham High Road. “I was crossing the road when I saw a man with a machete and silver canisters on his chest being chased by what I assume was an undercover police officer – as they were in civilian clothing,” he told PA Media.

“The man was then shot. I think I heard three gunshots but I can’t quite remember. After that I ran into the library to get to safety. From the library I saw a load of ambulances and armed police officers arrive on the scene.”

Facebook Twitter Pinterest An armed police officer on Streatham High Road, south London. Photograph: STR/EPA

He said people began running into nearby stores after the incident. “We were all informed to stay in buildings by armed police, until we were evacuated,” he said.

The mayor of London, Sadiq Khan, said in a statement: “A man has been shot dead by armed police in Streatham following an incident that is being treated as terrorism-related. A number of people are believed to have been stabbed.”

“I am in close contact with the Met commissioner and local representatives, and want to thank our police, security and emergency services staff for their swift and courageous response. They truly are the best.

“Terrorists seek to divide us and to destroy our way of life – here in London we were never let them succeed.”

Facebook Twitter Pinterest Police officers talk to people near the scene. Photograph: Hollie Adams/Getty Images

Boris Johnson, the prime minister, responded to the incident on Twitter, saying: “Thank you to all emergency services responding to the incident in Streatham, which the police have now declared as terrorism-related. My thoughts are with the injured and all those affected.”

The local Labour MP, Bell Ribeiro-Addy, also responded, saying: “Very concerned to hear about the incident on Streatham High St. My thoughts are with those injured, their families and those who witnessed the attack.”

Video footage posted by witnesses showed a huge police presence on Streatham High Road, as shoppers were held back by police officers. Paramedics and ambulances attended the scene, and police helicopters circled overhead.

The Met warned people to stay away from the area, tweeting: “Please avoid the area while the emergency services deal with the incident in Streatham”.

Graham Norton, the strategic commander at the London Ambulance Service, said: “We were called at 1.58pm today to reports of an incident in Streatham High Road. We are working closely with the other emergency services and are treating a number of patients at the scene.

Facebook Twitter Pinterest Police officers in Streatham. Photograph: Simon Dawson/Reuters

“We worked closely with the other emergency services and sent a number of resources including five ambulance crews, an advanced paramedic practitioner, an incident response officer and a motorcycle responder, with the first of our medics arriving in four minutes. We also dispatched London’s Air Ambulance.

“We treated three patients for injuries at the scene, and took all three people to hospital.”

Anna Norman-Walker, the rector of St Leonard’s Church in Streatham, tweeted: “Currently situation in the Streatham rectory with police tape both sides of us … Prayers for our wonderful police who are doing such a remarkable job in a frightening situation”.

Richard Mustonen-Smith, 59, a response pastor for Ascension Trust, has lived in the area all his life. He told PA Media: “I’m shocked it’s happened in Streatham. I’ve been here all my life. We’re always getting accidents down here but not this.

Facebook Twitter Pinterest A police vehicle on Streatham High Road. Photograph: Victoria Jones/PA

“My grandson was in the Odeon and they got told to go out the back because there was a bomb. They got them to go out of the back of the cinema.

“When it’s a member of your family so close to you you don’t expect it. You’re always worried about your family being on the streets but this is even worse.”