
Officers were confronted near the burning auto by a man "brandishing a knife and threatening them" while passers-by called out that people had been stabbed, he said.
After taking several swings at one of the officers, the attacker was shot in the chest.
Australian Federal Police Assistant Commissioner Ian McCartney told a media briefing on Saturday it was believed the attack was inspired by IS, though it was thought Shire Ali had no direct links to the organisation.
Police shot the man when he approached officers swinging the knife.
Police identified the attacker as 30-year-old Hassan Khalif Shire Ali, and said that his brother was arrested last year on charges of planning an attack in Melbourne.
Three people have been injured, according to Ambulance Victoria, while the man is in a critical condition and under police guard.
"Australians will never be intimidated by these appalling attacks".
Mr Morrison said he had long-standing relationships with the Muslim community and it was them who had raised with him concerns about radicalism in recent years.
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"What we know so far about the individual. from what we know we are treating this as a terrorism incident", Ashton said.
Witnesses reported a loud explosion from the vehicle, which burst into flames before a man emerged and began attacking people with a knife in the street, police said. At a press conference, a police spokesperson said there are no links to terrorism at this stage. One of the victims also died and the two others were hospitalized.
The man described as an eyewitness as "Muslim" went on a stabbing rampage after ramming his vehicle through pedestrians which later "exploded" in Bourke Street, Melbourne in the evening rush hour.
Trams are not running along Bourke Street or Swanston Street in either direction.
"This is an evil and terrifying thing that has happened", Victoria State Premier Daniel Andrews said.
Three people were reportedly been taken to hospital after the incident on Bourke St.
"Police shot the male in the chest and he is now in a critical condition in hospital", Superintendent Clayton said, adding the officers are okay".
"Because he was on his stomach, they turned him over to see if he's alright; he was still alive", he told AAP. James Cargasoulas is accused of driving his vehicle into pedestrians.
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