Ashton said the police initially responded to calls about a four-wheel-drive utility vehicle on fire in the busy Bourke Street Mall shopping district at about 4:10 p.m. local time. The reason for the attack has yet to be confirmed.
A video shared on Twitter clearly showed the attacker, a dark-skinned middle-aged man wearing a black sweatshirt, viciously swinging the knife he used to stab the civilians at police officers at the scene.
The suspect has been shot and is alive, police say. Police are not looking for anyone further at this early stage. It is unknown whether it came from the vehicle or was police gun fire.
"He's known to police mainly in respect to relatives that he has which certainly are persons of interest to us, and he's someone that accordingly is know to both Victorian police and the Federal intelligence authorities", he said.
According to the ABC, witnesses saw the man crash the auto, get out and throw an object into the vehicle that set it alight.
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The video shows the man attempting to slash police officers with a large knife before falling to the ground.
Two other people have been injured amid reports of a shooting and stabbing in Bourke Street this afternoon.
Officers were initially called to reports of a vehicle fire near Bourke Street, a busy thoroughfare, at about 16:20 local time (05:20 GMT).
The officers were seen trying for at least a minute to detain the man peaceably as his attacks on them continued, before one office shot him with a weapon.
However, at a later inquest, the coroner of New South Wales state said the gunman's actions fell "within the accepted definition of terrorism".
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Victoria Police said the unnamed attacker is in "critical condition" at the hospital following the incident, which left one of the victims dead. One had a head injury and the other suffered a neck injury, according to The Age.
"Passers-by were calling out that members of the public had been stabbed", he said.
"I really wanted to help but I was in shock, I didn't know what to do".
Bystander Drew Hair told AAP he was walking on Swanston Street when he heard an explosion.
The incident occurred on a section of the busy street that is closed to traffic.
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They said they heard screams and cries from the crowd before they were rushed from the area. Police are asking for members of the public to avoid the area.