A police spokesman said that authorities are not looking for any other offender. Photo: Reuters

Victoria Police Chief Commissioner Graham Ashton said the unnamed attacker later died in hospital after he was shot by police and arrested.

One of the victims was also confirmed dead, with the two others injured.

"We don't believe there is an ongoing threat at this stage, but certainly we are treating it as a terrorism incident," Ashton told reporters.

Somali

He declined to identify the attacker, but said he was Somali with "family associations that are well known to us".

Police placed part of the city on lockdown after the attacker drove a car laden with gas cylinders which caught fire in the city centre at around 4:20pm local time, as people began to leave work for the weekend.

Video posted to Twitter and broadcast on television showed a man repeatedly swinging an object at two police officers in central Melbourne. One of the officers raises his weapon, a shot is heard and the man falls to the ground clutching his chest.

Police warned people to avoid the area, but said they "are not looking for anyone further at this early stage."

Cordoned

"The exact circumstances are yet to be determined at this stage. The area has been cordoned off," the police earlier said.

Al Jazeera's Andrew Thomas, reporting from Sydney, said there have been a number of attacks in Australia that at the time of the incidents "were thought to be" related to "terrorism".

"[But] then, when the background of the person has been looked into, they've had mental health issues and no association with any known groups."

He added that the police do not believe this is part of anything bigger, but they will remain cautious.

The Islamic State of Iraq and the Levant (ISIL, also known as ISIS) group said, via its Amaq website, that one of its "fighters" carried out the stabbings on Friday. It did not provide any evidence to support its claim, nor did it name the attacker.

The street where the attack took place was also the scene of a fatal incident in January 2017, when a man drove his car at pedestrians at high speed, killing six people and wounding about 30.