Australia’s Prime Minister has declared “radical, violent, extremist Islam” the country’s greatest threat in the wake of the Melbourne attack

Scott Morrison said that the national terrorism advisory remained at “probable”, a day after a car was set on fire and three people were stabbed - one fatally- in the city.

The 31-year-old attacker, Hassan Khalif Shire Ali was shot after confronting officers on a busy city street, authorities said. He was taken into custody in a critical condition but later died from his injuries.

Mr Morrison said he "must be the first to call out religious extremism."

He added: “But here in Australia, we would be kidding ourselves if we did not call out the fact that the greatest threat of religious extremism in this country is the radical and dangerous ideology of extremist Islam.”

Australia has a five-level terror threat ranking system and “probable” is its midpoint. The threat likelihood has been set at probable since the five-level system was introduced in 2015.

Mr Morrison went on to urge Muslim leaders to ensure that dangerous teachings and ideologies do not take root in Australia by alerting authorities to radicalised members of their community, adding that “they must be proactive, they must be alert and they must call this out, in their communities and more broadly, for what it is.”

Police in Melbourne shoot a man who was attacking them with a knife (Twitter/@fayfayang)

Police believe the Somali-born Khalif Shire Ali was radicalised and inspired by Isis.

Although his passport was cancelled in 2015 after he made plans to travel to Syria, he was not being actively monitored before the attack.

Mourners paid tribute to the owner of Pellegrini’s cafe on Bourke Street, Sisto Malaspina,74, who was identified as the person who died from his stab wounds.

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Acting Deputy Commissioner for National Security, Ian McCartney, said while reports established that he held radicalised views, he did not pose a threat in relation to the national security environment.”

He added that the incident was a huge “wake-up call”.