One man was killed and two others injured after being stabbed by a man who set a ute alight outside the Target store near the busy intersection of Bourke and Swanston streets.

The attacker, who was a 31-year-old Somali community member known to ASIO, was shot by police after he repeatedly lunged at them with a knife.

A Ballarat woman has told of her terror after witnessing a car explode in the centre of Melbourne metres away from where they were standing.

One man was stabbed to death in the chaotic scenes on Bourke Street and police later opened fire and killed a 30-year-old man. Two other stabbing victims remain in hospital.

Victoria Police Chief Commissioner Graham Ashton has said police are treating today's Bourke Street attack as terror-related, while Premier Daniel Andrews has called it an "evil and terrible thing". 

A 26-year-old and a 58-year-old man were stabbed and taken to hospital with non-life threatening injuries. The man who was killed is yet to be formally identified.

Initial reports indicate the attacker was a Somali man who came to the country in the 1990s; reported to be 31 years old, he lived in the Melbourne's northwest.

POlice confirmed on Saturday the offender was 30-year-old Hassan Khalif Shire Ali. 

Police also said they had spoken to the wife of the offender but that she was not missing. Joint Counter Terrorism Team investigators are also executing search warrants at two addresses in Werribee and Meadows Heights this morning.

The man was  known to state and federal police and ASIO through his relatives who are persons of interest; previously known to police for cannabis use, theft and driving offences, according to media reports.

Louise Jeffrey and her husband Luke were in Bourke Street on Friday afternoon when the horrible incident unfolded, beginning when the ute exploded in front of them. 

A man was later stabbed to death in the chaotic scenes that unfolded as police opened fire on a suspect.

Mrs Jeffrey told The Courier the incident happened without warning in front of their eyes.

“First we heard an explosion, then a car burst into flames,” she said 

“We saw the door open and a man roll out onto the ground. We lost vision for a couple of seconds as a tram went past and as we saw vision again, we saw a man running towards the man who had rolled out of the car.

“We were presuming he went across to help, but next we noticed they semed to be fighting.”

Mrs Jeffrey said contrary to earlier reports, the car had been stationary at the time it exploded.

”After it exploded it started rolling towards us on fire, so we ran down into the mall towards Swanston Street.

“We stopped a little bit, then heard a second explosion which we think came from the same car. Some have said they heard up to seven explosions, but we only heard three. 

“We went straight back to our hotel.”

Mrs Jeffrey said it was a terrifying experience.

“It’s pretty awful, we’re still trying to make sense of what happened. It was literally only 10-15 metres in front of us.

“We didn’t see a knife, but we didn’t stop to look either. We’re a bit shaken, but we’ll be OK.”

The chaos unfolded quickly on Bourke Street. One bystander tried to push a trolley into the attacker. That man was pushed over onto the street, but got up and tried again with the trolley to stop the attack. Another man tried to ward him off with a traffic cone, a third was seen with a cafe chair.

Transit officers were the first to respond, with one officer using a tree to protect himself from the attacker as he lunged at them with the knife.

Police then shot the lone terrorist in the chest and arrested him before he was taken to hospital.

By 5.20pm, the body of one of the victims, believed to be a man in his 60’s,  was lying under a white sheet on Bourke Street surrounded by police tape, near the entrance to Russell Place. There were large spots of what appeared to be blood near the body, as well as a pair of men's black lace-up shoes.

About 6pm, police confirmed the victim had died.Fire crews later found a number of barbecue-style gas cylinders in the ute.

Premier Daniel Andrews condemned the attack. "This is an evil and terrifying thing that has happened in our city," he said.

He thanked police and praised the efforts of the civilians who had tried to help them.

"Those strangers, people who were bystanders, who knew nobody involved, who stepped in without a moment's hesitation to render support and assistance ... make all of us proud as well," Mr Andrews said.

Opposition Leader Matthew Guy said there should be no "moral squeamishness" when it came to dealing with extremism.

"There should be not moral squeamishness, we need to eradicate this kind of behaviour, because enough is enough," Mr Guy said.

Anyone with information is also urged to contact Crime Stoppers on 1800 333 000 or submit a confidential crime report online at www.crimestoppersvic.com.au

Members of the public who witnessed the event and wish to make a statement are asked to attend Melbourne West Police Station at 313 Spencer Street, Melbourne.