Police have linked the murder of a woman to a stabbing rampage in central Sydney which left another woman in hospital.

Key points: Members of the public apprehended the man using a milk crate, chair and crowbar

Members of the public apprehended the man using a milk crate, chair and crowbar Police confirmed a 21-year-old woman found dead in a unit block nearby was linked to the incident that shut down part of the city

Police confirmed a 21-year-old woman found dead in a unit block nearby was linked to the incident that shut down part of the city Another woman has been taken to St Vincent's Hospital with a stab wound

The body of the 21-year-old woman was found in an apartment complex on Clarence Street, a short distance from where a man, identified as 21-year-old Mert Ney, was wielding a large butcher's knife and later restrained by bystanders.

Police said the incident — which they described as "terrifying carnage" — did not appear to be terror related, the suspect had no known terrorist links and he was acting on his own.

Officers are currently searching the suspect's home near Blacktown in Sydney's west.

Mert Ney was arrested after the alleged stabbing incident in Sydney's CBD. ( Twitter: David Vaux )

The ABC understands the man escaped from a mental health facility and police confirmed he had a history of mental health problems.

The injured woman, a 41-year-old who police said was stabbed in the back in a "random attack", remains in a stable condition in Sydney's St Vincent's Hospital.

The 41-year-old woman was taken to hospital with a stab wound. ( AAP: Dean Lewins )

Reports of a man armed with a large knife on the streets of Sydney first emerged about 2:00pm, sparking a major police operation.

In what police described as "heroic" actions, passers-by and firefighters used chairs, a crowbar and a milk crate to apprehend the alleged offender, before he was arrested by authorities.

Police said the investigation was "live and ongoing".

"He was clearly dangerous and had motive," NSW Police Commissioner Michael Fuller said.

"But it is not currently classed as a terrorist incident, as the investigation continues we will reassess that."

The men used chairs and a milk crate to restrain the man. ( Twitter via AAP )

However, Commissioner Fuller said a thumb drive linked to the alleged offender suggested he had "some ideologies" in relation to terrorism.

"[It was] information [on] mass deaths and mass casualties around the world, namely from North America and New Zealand," he said.

"He was known to police but his history was unremarkable."

'He is going to kill you'

Channel 7 cameraman Paul Walker, who was stuck in traffic in the area at 2:00pm and spotted the alleged offender running down the street, told the ABC the man was "covered in blood" carrying a large knife.

"He jumped on the roof of the car behind us," he said.

"Then suddenly these firies who were in a firetruck a couple of vehicles in front jumped out.

"They had axes in their hand and were yelling at him to stop, put his weapon down and he just ignored them."

Reports of a man with a knife in Sydney's CBD sparked a major police response. ( AAP: Dean Lewins )

The man then ran down a nearby street.

"Another person [on the street] was screaming at people to get out of the way, the fact he had a knife and the fact he is going to kill you," Walker said.

He said the alleged offender was then knocked to the ground by a member of the public who grabbed a chair and "whacked him".

"Seconds later he was just piled on by quite a few people."

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 2 minutes 9 seconds 2 m 9 s Witness David Vaux describes seeing man with a knife

When the man fell he dropped a knife into the gutter.

NSW Police Superintendent Gavin Wood said the man had tried to stab others.

"There has been, again, subsequent to that stabbing a number of attempted stabbings by the same offender," he said.

'These people are heroes'

Superintendent Wood lauded the actions of the bystanders who restrained the alleged offender and called them "heroes".

"They were brave and I can only use that word seriously — they were significantly brave people," he said.

"To approach a person with a mindset of obviously what this person did, with clear evidence of a stabbing previously, these people are heroes."

The man has been taken to Day Street Police Station.

A number of crime scenes have been established and a number of road closures are in place.