Police storm siege building

Several people appear to have been injured. Photo: AP

Heavily armed police have stormed a cafe in Sydney where a gunman identified as an Iranian refugee has been holding dozens of people hostage.

Paramedics carrying stretchers raced towards the cafe moments after a volley of loud bangs and flashes.

Central Sydney has been in lockdown since the gunman seized the hostages early on Monday morning.

Early in the siege, hostages were forced to hold up a black Islamic banner at the window.

The cafe is located in Martin Place, a busy shopping area in Sydney's financial district.

Prime Minister Tony Abbott said it was "profoundly shocking" that people were being "held hostage by an armed person claiming political motivation".

As loud bangs were heard, several hostages ran to safety with their hands in the air, after which there was sustained heavy gunfire.

Police were seen carrying one woman from the scene as alarm bells sounded. Emergency aid was administered to others.

The suspect, 49-year-old Man Haron Monis, received political asylum in Australia in 1996 and was on bail facing a number of charges.

He was described by his former lawyer as an isolated figure.