Australian police said on Monday negotiators had been in contact with the gunman holding hostages in a Sydney cafe siege but refused to speculate on his possible motivation.
Television footage earlier showed five of the hostages running from the building. New South Wales Deputy Police Commissioner Catherine Burn declined to say how many were still being held in the cafe but said it "is not as high as 30".
Burn told reporters there was no indication that any of the remaining hostages had been harmed.
Hundreds of armed police have sealed off the normally busy Martin Place in Sydney's central business district.
Pictures on Australian television have shown at least three people with their hands up against a window, and a black flag with Arabic writing.
Australian Prime Minister Tony Abbott has described the incident as "deeply concerning".
He said it was not yet clear who was behind the incident or what their motives were, but said law enforcement agencies were well-equipped to respond.
In a brief news conference, he said the National Security Committee had been briefed, and urged Australians to go about their lives but to be alert.
"I can think of almost nothing more distressing, more terrifying than to be caught up in such a situation, and our hearts go out to these people," he said.
New South Wales Police said in a statement that an "armed incident" was under way, and that "specialist officers are attempting to make contact with those inside a cafe".
The police said nearby offices had been evacuated as a precaution and asked people to remain indoors and way from open windows.
Martin Place is a public pedestrian thoroughfare through the heart of Sydney, joining its parliamentary, legal and retail districts.
It is full of media, members of the public and the police, with what appear to be anxious colleagues of people trapped inside the building, waiting for news. Several surrounding blocks are cordoned off.
Police are at this stage not giving media briefings at the site - dozens of police cars have arrived at the scene, with more continuing to come.
Witnesses saw a man with a bag and gun walk into the Lindt chocolate shop and cafe. Police shut down the area, closing roads and moving people away. The Martin Place station was also closed.
Shortly after, television footage showed at least two people, thought to be employees of the cafe and who were visibly distressed, holding a black sign with the Islamic creed written on it up to the window.
The BBC's Security Correspondent Frank Gardner said the flag was similar to but not the same as that used by the Islamic State militant group in the Middle East.
An Australian Broadcasting Corporation reporter said that gunfire had been heard at the scene - but this has not been confirmed.
No injuries have been reported from the incident, according to a police spokesperson.
