The vehicle, a white SUV, drove through pedestrians outside the major Australian city’s main train station at 4.40pm ACT (5.40am GMT).
The area is one of the busiest in the Melbourne City centre.
14 people have since been taken to hospital – including a pre-school aged child who suffered a serious head injury.
Several people are believed to be in a critical condition.
Two people – one of whom was driving the vehicle, have since been arrested.
A police spokesman said: “At this stage we believe it was a deliberate act
“The crime scene will be in place for a considerable period of time and we are urging people who can avoid the area to avoid the area.”
One witness claimed the carnage in the heart of the city took place over just 15 seconds.
Speaking to the Herald Sun, witness Lachlan Read said: “He has gone straight through the red light at pace and it was bang, bang, bang.
“It was just one after the other. The last bang the car stopped.
“There were bodies on the ground and people running up to them — it was mayhem.
“It is definitely something you don’t expect to see on Flinders St.”
A man who gave his name as John, said it was “such a horrific scene”, describing “bodies being flown into the air.”
Speaking to ABC radio, another bystander added: “I heard the engine rev and I heard the first thump, and I turned around … I just saw it [the vehicle] ploughing through pedestrians as everyone was crossing the road, and then crashing into the tram stop.
One witness, Jim, said they believed the Suzuki was travelling at around 60mph.
He said: “The intersection was full of pedestrians and he just ploughed through.
“The only thing that slowed him down was him hitting pedestrians.
“There was no braking, there was no slowing down.
“Whether it was targeted or whether he had a heart attack, or was drunk, I don’t know.”
A woman called Nicola told ABC News she initially thought a bomb had gone off.
She said: “I was waiting for the train and there was a big bang and lots of screaming.
“I thought it must be a bomb. I could just see dust rising and we were told to get away and stay in the station.”