Three people are reported to have been injured, with one in a critical condition after being stabbed in the neck.
The condition of the other two is not known.
Video shot my a member of the public appears to show the suspect attempting to attack police with a knife and trolly before a shot is fired.
Police confirmed the man was shot and is in a critical condition. According to police the man, who is in a critical condition, is under police guard.
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 gun shot initially”.
Members of the public helped police subdue the suspect.
Dozens of police cars are on the scene with helicopters overhead.
Footage has emerged showing the suspect being restrained by two men, at least one of whom is a police officer.
Victoria Police released a statement saying: “Police are currently at an incident on Bourke Street in the CBD. Police initially responded to a report of a car on fire near the corner of Swanston Street about 4.20pm.
“A man was arrested at the scene and has been taken to hospital under police guard in a critical condition. Police are not looking for anyone further at this early stage.”
Police are urging people to avoid Swanston Street and Bourke Street.
Guardian Australia’s Christopher Knaus spoke to Neil McKellar who said: “We heard the explosion, and we heard gunshots later.
“We heard it but we didn’t know what it was.”
One Twitter user posted: “I’m shaking. I was walking down Bourke Street and a car exploded.”
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.
Police are not looking for any other suspects at this stage and are asking for witnesses to contact them, as well as uploading footage and photographs giving an indication of what happened here
Mr Clayton added: “At this stage we are keeping an open mind. There is no known link to terrorism at this stage.”
More to follow…