The victim died at the scene while the other two victims were rushed to hospital.
According to Melbourne Police was taken into custody after being shot and was moved to hospital in critical conditions under police guard.
Video captured at the scene of the Melbourne attack in Bourke Street shows the alleged perpetrator charging at two officers. A car can be seen burning in the background.
The man, wearing a black hoodie, can be seen making repeated attempts to hit one of the officers who raises his arm to defend himself.
A member of the public can be seen towards the end of the video attempting to help the officers coming at the alleged attacker with a shopping trolley.
Victoria Police said they initially responded to a report of a car on fire in the area at about 4.20pm (5.20am GMT) on Friday.
“A man was arrested at the scene and has been taken to hospital under police guard in a critical condition,” the force said.
“Police are not looking for anyone further at this early stage. A small number of people are being treated for stab wounds.
“The exact circumstances are yet to be determined at this stage. The area has been cordoned off and the public are urged to avoid the area.”
Australia Police said they are not looking for anyone else “at the time” but urged eye-witnesses to come forward with video and photographs to help the investigation into the attack.
Melbourne resident Meegan May tweeted: “Chaos in Bourkest as a guy seems to have set his car on fire then attacking police with a knife.
“Police response was swift and overwhelming. I heard at least one gunshot initially”.
Members of the public helped police subdue the suspect.
Footage has emerged showing the suspect being restrained by two men, at least one of whom is a police officer.
Speaking at the scene, Superintendent David Clayton said: “Police quickly responded to the incident.
“As they got out of the car they were quickly confronted by a male brandishing a knife and threatening them.
“At the same time passers-by were pointing out that members of the public had been stabbed.
“Police shot the male and he is now in a critical condition and under guard in hospital.
“Three people have been stabbed. Unfortunately one is dead at the scene, two others are at hospital.”
Mr Clayton said Victoria Police’s gun response unit had cordoned off the area and the bomb response unit was making the scene safe while Melbourne Fire Brigade had tackled the car fire.