"We are now treating this as a terrorism event", said Victoria Police Chief Commissioner Graham Ashton, adding that the suspect is "someone that is known to us" and had travelled to central Melbourne in a 4x4 packed with gas bottles.
The man again attempted to stab and slash at the officers several times before one policeman unsuccessfully tried to taser him. his partner then shot the attacker in the chest.
An Australian police officer stands outside a property that was searched by Australian counter-terrorism investigators, located in the Melbourne suburb of Werribee, Australia.
Video posted to Twitter and broadcast on television showed a man repeatedly swinging an object at two police officers in the downtown area of the city.
The journalist also said an emergency speaker system was warning people to avoid the area.
Ambulance Victoria has also confirmed that three people were assessed at the scene.
"He seemed to be waving something, people around me screamed that he had a knife, but I couldn't see clearly from where I was", she said.
Counterterrorism command and homicide teams are investigating the incident, but police do not perceive any ongoing threats at this stage, they said.
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The attack on Bourke Street horrified hundreds of onlookers during the afternoon rush hour in Australia's second-biggest city.
He has been taken to hospital in a critical condition under police guard.
Police have said they believe the attacker acted alone and they are not searching for other suspects.
The two others, aged 26 and 58, were in hospital with non-life-threatening injuries.
Two civilians became involved as well as two police, trying to stop the man.
Bourke Street reopened on Saturday morning, and a Reuters reporter said there was an increased police presence in the area.
"Because he was on his stomach, they turned him over to see if he's alright, he was still alive", nearby KFC worker Markel Villasin told AAP.
Trams are not running along Bourke Street or Swanston Street in either direction. He is accused of deliberately driving his auto into pedestrians on the same Melbourne Street in 2017, hitting 33 people and killing six.