A man who stabbed one person to death in a suspected terrorist attack in Melbourne was known to police and was the brother of a man arrested on terror charges last year, Australian authorities say.

The Somali-born man, 31, set fire to a pickup truck laden with gas cylinders in a busy shopping area of the city on Friday, stabbing three people, one fatally, before he was shot dead by police.

Australian media had named the man on Saturday, but police have yet to confirm his identity.

Victoria Police commissioner Graham Ashton said the man's brother was arrested last year on charges of planning an attack in Melbourne and currently being held in prison awaiting trial.

“He is certainly someone who is known to both us and the federal authorities in relation to counter-terrorism and terrorism-related matters,” he told Channel 7's Sunrise program.

“He is the brother of an offender or a suspect that we arrested late last year in relation to the preparation of a terrorist event.”

Video posted to social media of the incident showed the attacker repeatedly swinging the knife at officers, while a member of the public pushes a trolley into the attacker, knocking him over. Towards the end of the video, one of the police takes out a gun and shoots the knifeman.

Victoria Police later confirmed the man had been shot in the chest and was in hospital in critical condition, while several others are being treated for stabbing injuries. Victoria's ambulance service said that three injured people were being treated at the scene.

Superintendent David Clayton said at an impromptu press conference as the police were attempting to disarm the man, passers-by were shouting at them that people had been stabbed.

One of the victims died at the scene while two others had been taken to hospital for treatment, he said.

The police were not looking for anyone else over the incident and there was no known connection to terrorism yet, although "we will keep an open mind as to whether there is any link", he told reporters.

A police officer directs people away from the crime scene as a body is seen covered with a white sheet following a stabbing incident in Melbourne (AFP/Getty Images)

Bomb disposal experts had now arrived and were working to make the area safe, while the fire brigade had put out the car on fire.

Unconfirmed reports from the Australian broadcaster ABC suggest that the man crashed the car, jumped out and then threw an object inside the vehicle, setting it on fire.

A section of Bourke Street, a major tram thoroughfare and one of the busiest streets in Melbourne's city centre, has been closed off to traffic and shoppers.

Melbourne knife attack Show all 9 1 /9 Melbourne knife attack Melbourne knife attack The body of the person stabbed to death during the attack lies underneath a white cover EPA Melbourne knife attack There was a huge police presence in Melbourne's city centre Reuters Melbourne knife attack Officers cordon off the scene AFP Melbourne knife attack Victoria Police Superintendent David Clayton speaks to members of the media REUTERS Melbourne knife attack A screenshot of a video of the man attacking police officers with a knife EPA Melbourne knife attack Police in Melbourne shoot a man who was attacking them with a knife Twitter/@fayfayang Melbourne knife attack There was a huge police presence in Melbourne's city centre Reuters Melbourne knife attack The burned out shell of the knife attacker's car AFP Melbourne knife attack Bomb disposal experts were called after gas canisters were found in the car the attacker had set on fire Reuters

One witness, who only gave the name Markel, said he ran out of a nearby shop and stumbled across one of the victims.

"Turned out there was an old man in front of me, literally by my feet. He was face down, face down, and there was a lot of blood," he told the ABC. "I was already stepping on his blood.

"There was a lot of bystanders trying to help him out. They didn't know what to do because obviously in that situation it is pretty crazy."

Markel said other shoppers in the area were yelling out "just shoot him, just shoot him," while the two officers were trying to disarm the knifeman.

Aerial footage of area of Bourke Street incident in Melbourne

Another witness, Aaksh Verma, said that he saw the man try and stab one of the police officers as soon as they arrived, while they were still inside their car.

Once the officers got out of the car they used pepper spray and then a taser on the knifeman, but neither forced him to abandon his attack, he told The Guardian.

The incident caused authorities to activate an automated alert system, sending messages to Melbourne citizens' phones warning them of "an incident at the corner of Bourke and Swanston streets" and urging them to "avoid the area".

Police are extending a cordon of the area and Supt Clayton asked for anyone who had seen the incident and taken any photos or videos to come forward and share them with detectives.

Australia has been on heightened alert from 2015 for attacks by home-grown militants returning from fighting in the Middle East.

Police statement on Bourke Street incident in Melbourne

The street where the car caught fire was the scene in December 2017 of a fatal but not terror-related incident in which a man drove his car at pedestrians at high speed, killing six people and wounding about 30.

Elsewhere in the city, a murder and armed siege by a man out of prison on parole was declared an "act of terrorism". Yacqub Khayre was shot dead by police after he had killed man inside an apartment block and then held a woman hostage inside.

In 2014 an 18-year-old terror suspect was shot dead after stabbing two police officers during a counter-terrorism operation in the city.

The Lord Mayor of Melbourne, Sally Capp, has praised residents of the city in a statement for how they dealt with the incident.

"I’m proud of the way our community responded respectfully to police instructions at the scene. I know many of us will feel the impact of these terrible events and it’s important at these times that we pull together as a community and support one another.

"Melburnians should be reassured by the rapid response from Victoria Police and emergency services who worked quickly, bravely and effectively to minimise harm to the public and contain the situation."