IS claims Melbourne attack; PM Turnbull calls it 'cowardly'

Police shot dead gunman Yacqub Khayre after he held a woman hostage inside an apartment building in Melbourne, Australia's second-largest city.

He forced her to call Channel Seven news in Melbourne during the stand-off with police, then said: "This is for IS (Islamic State)".

He killed one man in the lobby of an apartment building in Melbourne, and held a female escort hostage of several hours.

The woman was rescued unhurt, but three police officers suffered non-life threatening gunshot wounds.

"The attack in Melbourne, Australia was carried out by a soldier of the Islamic State in response to the call for targeting the subjects of the coalition states", ISIS Amaq news agency said, relating to Australia's partnership in the U.S. counter-ISIS coalition.

Prime Minister Malcolm Turnbull said there were "very grave questions" about how Khayre got parole despite his violent, criminal history. "It is a terrorist attack and it underlines the need for us to be constantly vigilant", he said.

Melbourne police last night launched an investigation into whether the attacker had any links to terrorism - and now it's been revealed that he does, with Khayre having faced court in 2009 over the planning of a terror attack on a Sydney army barracks.

The home the Melbourne siege gunman shared with his mother has been raided by police who at this stage believe he was acting alone.

There was no indication the incident was part of a wider plot, Ashton said.

Australian officials say they have prevented 12 attacks in the country since the threat level was raised from "possible" to "probable" in September 2014.

While police are treating the incident as an act of terrorism, Ashton was not able to confirm that ISIS was behind the attack.

Islamic State has claimed responsibility for Monday's incident, that left an employee of the Brighton serviced apartments where the siege occurred dead.

It was at that exact moment that Somali-born refugee Yacqub Khayre, 29, emerged from his hideout and opened fire on waiting police, injuring three before he was shot dead.

Premier Daniel Andrews said there is no way to "eliminate risk", just to mitigate it and said he had nothing but praise for the way police acted.

"We believe that this person was there with those sorts of intentions, albeit we don't know whether it was something planned at this stage", Ashton said.

Prime Minister Turnbull described the attack as "shocking" and a "cowardly crime".

Khayre then called police to say he had a hostage in an apartment and made threats to her if police intervened.

Later, police said they were aware of a claim from ISIS that one of its "soldiers" carried out the attack.