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A 21-year-old British woman was stabbed to death by a knifeman who went on a rampage while allegedly shouting 'Allahu Akbar' at an Australian hostel.

Police are probing possible terrorist links after the attack which also left a 31-year-old British man fighting for his life in hospital.

A third man, a 46-year-old Australian who intervened in the fight, was also stabbed in a leg but his wounds were not life-threatening and he was released from hospital following the frenzied attack last night.

British consular staff were called in by police and have been in contact with families of the victims.

The woman was named locally as waitress Mia Ayliffe-Chung, who had been in the area for 10 days and was planning find work as a fruit picker there.

A French man aged 29, who is now in police custody, also stabbed a dog to death during the attack witnessed by a roomful of more than 30 people at Shelly’s Backpackers in the small town of Home Hill, south of Townsville, Queensland.

Supt Ray Rohweder said police were confronted by a “terrible scene” when they arrived at the hostel after 11.15pm.

Two officers ordered the attacker, who had injuries to his arms, to lay on the ground and grabbed the knife he used in the attack.

Queensland state Deputy Police Commissioner Steve Golleschewski told reporters: “Initial inquiries indicate that comments which may be construed as being of an extremist nature were made by the alleged offender..

“We’ve had three people stabbed, one deceased, one critically injured. It’s a shocking attack by any standards.”

The arrested man, who has been in Australia on a temporary visa since March, was also caught on police body camera shouting ‘Allah Akbar” as he was taken into custody.

The man was taken to Townsville Hospital to be assessed for mental health and drug issues as anti-terror police began their investigation into the horrific crime.

No charges have yet been laid.