Two other victims have been taken to hospital with injuries.

One of the injured people has a neck injury and is in a suspected critical condition, while another has a head injury, according to Ambulance Victoria.

Police said a small number of people were being treated for stab wounds.

The incident occurred on a section of the busy street that is closed to traffic.

Video uploaded onto social media shows the suspect running at two police officers with a large knife as the blue ute burns in the background.

A bystander tries to assist police by ramming a shopping trolley between police and the suspect.

The suspect is then shot by police and falls to the ground.

About 4.31pm, police send out a media alert asking the public to avoid the Bourke Street area.

Businesses in the are have closed and emergency crews are at the scene.

Counter terrorism police have been notified and are investigating. It is not yet known if the incident is terror related.

Shortly after 5.20pm, a body is seen lying under a white sheet on Bourke Street, near the entrance to Russell Place. Large spots of what appears to be blood are near the body alongside a pair of men's black lace-up shoes.

Terror sirens have been activated from loudspeakers in the city. A warning is being played over the speakers telling pedestrians to evacuate the area.

It's the first time the sirens have been used in a situation that is not a drill.

About 6pm, Victoria Police Superintendent David Clayton holds a press conference just metres from where the incident unfolded. He confirms that the offender has been shot and is under police guard.

He also shares the sad news that one victim has died.

“The investigation is ongoing and we are keeping an open mind,” he says.

The bomb squad has cordoned off the area.