An ice-addicted African refugee on parole who had links to Somalia-based terrorist group al-Shabaab was behind an ISIS-inspired attack on the streets of Melbourne.

Yacqub Khayre murdered one man, wounded three police officers and took a woman hostage in a dramatic two-hour siege in a hotel on Bay Street, Brighton, on Monday.

Police say the hostage was a sex worker Khayre had hired through an escort agency, posing as a client, and then tied up as he hid inside the building armed with a sawn-off shotgun and wearing a balaclava and gloves.

The 29-year-old refugee shot dead an innocent Chinese-born Australian clerk as part of a suspected trap to lure police into 'The Buckingham' serviced apartments.

Just before 6pm, he appeared in the foyer of the hotel, firing shots at waiting tactical command officers heavily armed and wearing bullet-proof vests.

Three officers were struck by bullet fragments, one in the neck, while Khayre was fatally wounded during an exchange of 'severe' gunfire, ending the two-hour siege.

But questions have since risen over why the man, who carried out a violent meth-fuelled home invasion just months after he was accused of planning a suicide attack against Sydney's Holsworthy army barracks, wasn't just deported back to Somalia.

It's also believed Khayre may have taken off his GPS ankle bracelet to carry out the attack covertly, inspired by instructions in a recent IS propaganda magazine.

Issue nine of Rumiya, released in May, encourages terrorists to 'lure' hostages and 'keep victims alive and restrained... (to) spread terror into the hearts of disbelievers'.

Scroll down for video

Yacqub Khayre (pictured) has been named as the attacker behind the 'ISIS-inspired' siege in Brighton, in Melbourne's south-east, which unfolded on Monday afternoon and left a man dead

The 29-year-old refugee was shot dead by heavily armed tactical command officers (pictured) after he opened fire on waiting police with a sawn-off shotgun

At 5.40pm, some 20 minutes before he died, Khayre called up a TV newsroom to claim: 'This is for IS, this is for al-Qaeda' (specialist counter terrorism police officer is pictured just moments before violent confrontation)

Police allege Khayre hired a sex worker through an escort agency and held her hostage, tying her up as he hid inside the hotel with a sawn-off shotgun waiting for police to arrive

Prime Minister Malcolm Turnbull said there were 'very grave questions' about why the known violent offender was out on the streets on parole.

'How was this man on parole? He had a long record of violence,' Mr Turnbull said.

'He was known to have connections - at least in the past - with violent extremism.'

Victorian Premier Daniel Andrews promised to look at every part of the parole system, but said it had already worked to keep Khayre in jail longer than his minimum sentence.

'(Since his release) he's been compliant, including drug tests, attending appointments and observing a curfew,' Mr Andrew

The prime minister, who has twice spoken with Mr Andrews since the siege, highlighted comparisons to Lindt Cafe hostage-taken Man Monis and the killer of Melbourne woman Jill Meagher.

'More investigations and explanations will be given but it is plainly - it is very hard, I think - to understand why he was released on parole given the nature of his record and the nature of his offence,' he said.

'Hard covered book with Arabic writing (in cloth bag) on desk in living room': Investigators were seen holding a paper bag of evidence found inside the Melbourne apartment where the bloody siege took place

The 29-year-old is a Somalian refugee who was on parole when he committed the ISIS-inspired attack. He had done time in jail for a violent meth-fuelled home invasion in 2011

Terrified witnesses described being ordered to crawl towards police on their bellies after unwittingly walking in the middle of the hostage negotiations (hotel pictured)

Police also executed a search warrant at a home in Roxborough Park, where Khayre lived with his mother, on Tuesday morning. Forensic investigators were pictured entering the home

Investigators at Roxborough Park load bags of evidence from the terrorist's family home into a car

'We are going to be at that location for some time conducting inquiries there,' Commissioner Ashton said of Khayre's family home

Police have begun canvassing the killer's neighbourhood and are speaking to members of his family

Police start their investigations outside the scene of the bloody siege

Prime Minister Malcolm Turnbull questioned why the known violent offender was on parole

In 1991, at the age of just three, Khayre and his family fled war-torn Somalia, arriving in Australia to live with his uncle and grandfather.

Growing up in Gladstone Park, north Melbourne, he was reportedly a good student at school until his grandfather died in Year 12 and he fell in with the 'wrong crowd'.

From there he began committing petty crime and stole his uncle's car in 2006.

In 2007, he was charged with armed robbery after holding up passengers on a Melbourne train, leaving one man with knife wounds.

He was among five men charged with planning a terrorist attack on the Holsworthy army barracks.

The group were alleged to have planned to break into the secure base and kill as many army personnel as possible.

Khayre was one of only two to be cleared.

That came despite him reportedly travelling to Somalia in 2009 or 2010, where he may have attended 'weapons and military' and visited a cleric to gain 'holy approval' to carry out the attack.

The other three men involved in the terrorist plot, all friends from the notorious '8 Blacks' Islamic prayer centre, are serving out 18-year sentences behind bars.

Police remove a body from the apartment in Brighton after a deadly two-hour siege that left two men, an Australian national working as a clerk and an ISIS-inspired gunman, dead

Heavily armed police swarmed the Brighton area as the hostage situation unfolded on Monday

A bomb squad member suits up before entering the serviced apartment blocks to search for any explosives

After being acquitted of terror charges, Khayre was jailed for three years for carrying out a drug-affected home invasion in Melbourne's north in 2011.

High on ice, Khayre was reportedly armed with a knife when he broke into a house and violently assaulted a young woman and her father.

He fled with Apple electronics, a watch, laptop, jewellery and money.

Despite being well known to counter terrorism police, he was deemed a low-risk of offending and released on parole - before committing the attack in Melbourne.

'He is someone that was known to us as having a long criminal history. A whole range of offending going back many years,' Victoria Police Commissioner Graham Ashton admitted in a press conference on Tuesday.

'Most recently he has done some prison time in relation to reckless and intentionally causing injury, and intentionally causing injury, and whilst in prison, he was processed as well for an arson whilst in the corrections system.'

'Ultimately, he has been qualified for parole, received parole and was on parole at the time of this offence.'

'The early advice from the Department of Corrections was that he was compliant with parole and hadn't presented any issues in relation to his conduct whilst on parole leading up to yesterday.'

'Long history of violence': Prime Minister Malcolm Turnbull questioned why Khayre (pictured right) was let out on parole given his past violent convictions

Three officers were struck by bullet fragments, one in the neck, while Khayre was fatally wounded during an exchange of 'severe' gunfire, ending the two-hour siege (officer seen keeping watch during the hostage situation)

Commissioner Ashton said a coronial investigation was being carried out by the Homicide Squad, with oversight from Professional Standards Command

Investigators were seen holding a paper bag of evidence found inside the Melbourne apartment where the bloody siege took place with the words: 'Hard covered book with Arabic writing (in cloth bag) on desk in living room' scrawled on it.

Police also executed a search warrant at a home in Roxborough Park, where Khayre lived with his mother, on Tuesday morning.

'We are going to be at that location for some time conducting inquiries there,' Commissioner Ashton said.

'There is a full forensic effort being done. This is now a coronial investigation, being done by the Homicide Squad, with oversight from Professional Standards Command.

'There will be extensive work required at 408 Bay Street today.

'We will have a lot of police down there today, knocking on doors, talking to people, for witness accounts and also with reassuring the community down there.'

Neighbour Ina Tuariki said she was 'devastated' to discover from news reports she lived next door to the gunman.

She told how he lived in the three bedroom bungalow, worth around $600,000 due to close proximity to the shops and station, with his two younger brothers, both teenagers, plus his mother.

'He always said hello to me and seemed normal,' she said.

'I was never concerned about him. There are young people around here on ice and going off the rails but he wasn't one of them.'

A police helicopter hovered above the house as police erected two police tents to store evidence gathered from inside the property. More follows

Police crowd the streets on Monday night during the violent siege. It has since been revealed that the gunman had a history of violent crime and drug-abuse

The bomb squad were called in 'to make sure the building is safe before forensics enter,' a police source said at the scene

Monday's incident began with locals reporting an 'explosion' inside the serviced apartments. Police believe this was the sounds of Khayre shooting dead his first victim

Islamic State has claimed responsibility for the incident that left gunman Yacqub Khayre and another man dead.

'The attack in Melbourne, Australia was carried out by a soldier of the Islamic State in response to the call for targeting the subjects of the coalition states,' the group's Amaq news agency said.

IS blamed the attack on Australia's membership in the US-led coalition against the militant group.

On Monday afternoon, the Seven Network took a phone call in its Melbourne newsroom from a woman who said she was in a hostage situation before Khayre came on the line saying 'This is for IS, this is for al-Qaeda'.

Mr Ashton earlier told Nine that the gunman had been known to police because of his background 'in relation to terrorism matters, albeit some years ago.'

He said there had been no information that he had been planning an attack.

'He is someone certainly known to us from his background but certainly as of yesterday there wasn't anything that we had that suggested that he was planning on embarking on this, that this was anything more than a spontaneous act.'

Victorian Premier Daniel Andrews and Mr Ashton will hold a press conference at 8.30am on Tuesday to address fears of a terror link.

Victoria Police are treating Monday's deadly Brighton siege as a terrorist incident

Islamic State has claimed responsibility for the incident, blaming the attack on Australia's membership in the US-led coalition against the militant group

Sources told the Herald Sun he was rated as 'a low-risk person of interest' by anti-terror police.

Police were called to the Brighton serviced apartment building at 5.41pm on Monday to reports of an explosion.

When they arrived, they found a man shot dead in the foyer.

They began efforts to negotiate with the gunman who was holding a woman hostage in one of the apartments.

Deputy Commissioner Andrew Crisp said on Monday night that the man spoken to by negotiators inside the building came out about 6pm and opened fire, hitting three police.

They returned fire and killed him.

Two male officers were taken to hospital for treatment while another was treated at the scene.