A man has been shot dead by police and three officers have been injured after a hostage situation at an apartment block in Brighton in Melbourne's Bayside suburbs.

Key points: Three officers were injured after they were fired upon by a man holding a woman hostage in Brighton

Three officers were injured after they were fired upon by a man holding a woman hostage in Brighton Police shot the gunman dead as he exited the apartment

Police shot the gunman dead as he exited the apartment Terrorism has not been ruled out as police investigate the incident

The deadly stand-off began shortly after 4:00pm when emergency services responded to reports of an explosion at the serviced apartments in Bay Street.

Officers called to the scene discovered the body of a man in the foyer of the building.

"Police arrived not long after 4:00pm and at that stage located a deceased male at the serviced apartments," Assistant Commissioner Andrew Crisp from Victoria Police said.

"A short time later a phone call was made to triple-0 by a female stating there was a hostage situation and a deceased male."

Reinforcements and specialist police were then called in, he said.

"Just before 6:00pm whilst police resources were in the vicinity of the serviced apartments, a male has exited one of the serviced apartments and began firing at police members," Assistant Commissioner Crisp said.

"Police members returned fire and as a result of that fire the man who exited the service apartments was fatally shot."

Three male officers were shot by the man, who police said was yet to be identified.

Witnesses said they heard what sounded like an explosion about 4:00pm. ( ABC News )

Two were taken to hospital and one was treated at the scene. Their injuries are not life-threatening.

Assistant Commissioner Crisp said terrorism was "one line of inquiry" being pursued by police following the incident.

He said reports of a phone call made to Channel 7 by someone referencing Islamic State were being investigated, but could not confirm the call came from the gunman.

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"That's all part of the investigation at this point in time as to who made that phone call, but we will certainly be working with Channel 7 in relation to that phone call," he said.

Police are yet to identify the man found dead in the foyer of the apartments.

The woman taken hostage, believed to be in her 20s, was rescued and is safe, Assistant Commissioner Crisp said.

Witnesses reported hearing a volley of gunshots just after 6:00pm and police urged pedestrians to take cover in a nearby supermarket.

Deputy Commissioner Crisp said police had no contact with the man during the siege and only received one call from the woman who was held hostage.

He said it was unclear how long the man at the centre of the siege had been staying at the apartments.

He said police would be at the scene for "quite some time" as officers cleared the area.

Premier Daniel Andrews said his thoughts were with the injured officers.

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Will Reid, who lives around the corner from the apartment block, described the scene as frightening.

"I got told there was an explosion around 4:00pm. I hung around for a while and I heard gunshots, about 10 shots, and we got told it was a hostage situation," he said.

"We got pushed back into the Coles [supermarket] and got told to not move, basically.

"It was frightening, you wouldn't expect that in Brighton at all."

Witness Michelle Purcell had gone outside to see what the commotion was, before police told her to go back inside.

"A couple minutes later the cop came back and told us there was a hostage situation at the back of the apartments and basically he told us we needed to evacuate because there was an explosion earlier and they weren't sure what was going to happen," she said.

"We just saw a bunch of cars pulling up at the intersection and there were cops running around and pulling out vests.

"It was a bit scary looking out the window and having watched them set up their guns, so I knew at that point there was something more serious going on."

A nearby swimming school was also evacuated as the events unfolded.

A witness told ABC Radio Melbourne that traffic in the area was heavy as a result of police diversions.

"I saw a couple of police hiding behind letterboxes and one also sort of bobbing behind one of their police cars," Kate said.

"It didn't look too good and all the streets are closed off around the area."