The armed man holding people hostage in a Martin Place cafe reportedly told hostages he has planted four bombs.

Network Ten said it had spoken with two hostages inside the cafe, who were hysterical as they relayed the man's demands.

The man said two bombs are in the cafe and the others are elsewhere in the CBD.

He also demanded delivery of an Islamic State flag and a conversation with Prime Minister Tony Abbott.

Five people have escaped the central Sydney cafe where the gunman has been holding up to 30 hostages.

Two women raced to the safety of police officers at around 5pm local time after three men fled the scene just over an hour earlier.

St. Vincent's hospital spokesman David Faktor said a male hostage was in a satisfactory condition in the hospital's emergency department.

"He's sitting up and that's all we can give out. We can't talk about the reason for his presentation," Faktor said.

Police believe there is only one gunman conducting the Martin Place cafe siege which started at around 10am.

Earlier a Sydney radio station revealed that it had been contacted twice by a hostage inside the Lindt cafe in Martin Place.

2GB's Ray Hadley says he could hear a gunman giving instructions to the young hostage off air.

Mr Hadley says the call was taken off air and then confirmed by the Police Commissioner.

Another call has been made to the talkback radio station but no negotiations will be made between the media and the armed offender.

Earlier Prime Minister Tony Abbott urged Australians to go about their business as usual despite the "disturbing" incident in Sydney's CBD.

"Australia is a peaceful, open, and generous society," he told reporters in Canberra. "Nothing should ever change that."

Mr Abbott said there are indications the incident is "politically motivated".

The hostage-taker is described as bearded and middle aged and appears to be wearing a black backpack.

A flag put up in the cafe window on Martin Place reportedly reads in Arabic, 'There is no God but Allah and Mohammed is the messenger of God.' The flag appears to be the Shahada flag which is religiously significant and respected by mainstream Muslims around the world but has also been recently adopted by extremist groups such as the Al Qaeda linked al-Nusra Front which is active in Syria and Lebanon.

It's being reported the gunman claimed there are "devices" all over the city and he wants to speak to the Prime Minister live on radio.

Lindt Australia CEO Steve Loane told news.com.au says he believes there are up to 50 people inside the cafe, including customers and staff. A woman is believed to have raised the alarm at 9.44am (AT) when she saw a man outside the cafe carrying a blue sports bag with a gun inside.

The NSW Supreme Court's criminal courts have been evacuated and dozens of government and commercial buildings in the blocks surrounding the siege, including the Reserve Bank and the NSW Department of Transport have been locked down.

State Parliament has been shut to public and the Civil Aviation and Safety Authority has reportedly shut down airspace above the area. Police officers have guns drawn outside the cafébut there is no confirmation yet that this is a terrorist attack.

Journalist Chris Kenny, who was in the shop about 20 minutes before the siege began, said he understood the automatic glass sliding doors had been disabled.

Martin Place was initially named as a potential target during terror raids earlier this year.

The government's National Security Committee of Cabinet has met for briefings on the situation.

- with AAP