A number of hostages have been seen running out of a Sydney café at the centre of a siege, according to Channel 7 live news footage.
An armed assailant was holding an unknown number of hostages inside the café, police said, with local television showing some being forced to hold up a black flag with white Arabic writing in the window.
Channel 7 footage showed a small number of people leaving the Lindt café, including one wearing a Lindt apron, as armed police moved closer to the door.
Australian police said negotiators had been in contact with the gunman but refused to speculate on his possible motivation.
New South Wales Deputy Police Commissioner Catherine Burn declined to say how many were still being held in the café but said it “is not as high as 30”.
Ms Burn told reporters there was no indication that any of the remaining hostages had been harmed.
Prime Minister Tony Abbott, who has warned of militant plans to strike Australian targets, said there were indications the drama at the Lindt Cafe was politically motivated.
Australia, a staunch ally of the United States and its escalating action against the Islamic State in Syria and Iraq, is on high alert for attacks by home-grown militants returning from fighting in the Middle East.