Hostages have been taken inside a central Sydney cafe where a black flag with white Arabic writing can be seen on the window, according to local media.
A police operation is underway in the area known as Martin Place, home to the Reserve Bank of Australia and numerous other commercial institutions.
Local television showed images of hostages inside the Lindt Cafe taken shortly after the incident began.
Prime Minister Tony Abbott called an emergency meeting of the cabinet's national security committee.
Abbott described the incident as "deeply concerning."
Authorities have cordoned off numerous streets.
The incident remains under investigation.
