Reuters/Sydney

New South Wales police said two men, aged 34 and 50, and a 38-year-old woman died. The attacker was among the fatalities.

Heavy gunfire and blasts from stun grenades filled the air shortly after 2am local time (1500 GMT yesterday).

Moments earlier at least six people believed to have been held captive managed to flee after gunshots were heard coming from the cafe, and police later confirmed that they made their move in response.

So far 17 hostages have been accounted for.

Medics tried to resuscitate at least one person after the raid and took away several wounded people on stretchers, said a Reuters witness at the scene in downtown Sydney. Bomb squad members moved in to search for explosives, but none were found.

The operation began shortly after a police source named the gunman as Man Haron Monis, an Iranian refugee and self-styled sheikh facing multiple charges of sexual assault as well as being an accessory to murder.

He was also found guilty in 2012 of sending offensive and threatening letters to families of eight Australian soldiers killed in Afghanistan, as a protest against Australia’s involvement in the conflict, according to local media reports.

A US security official said the US government was being advised by Australia that there was no sign at this stage that the gunman was connected to known terrorist organisations.

Although the hostage taker was known to the authorities, security experts said preventing attacks by people acting alone could be difficult.

“Today’s crisis throws into sharp relief the dangers of lone wolf terrorism,” said Cornell University law professor Jens David Ohlin, speaking in New York.

“There are two areas of concern. The first is ISIS (Islamic State) fighters with foreign passports who return to their home countries to commit acts of terrorism.

“The second is ISIS sympathisers radicalised on the internet who take it upon themselves to commit terrorist attacks to fulfil their radical ideology.

“We are entering a new phase of terrorism that is far more dangerous, and more difficult to defeat, than Al Qaeda ever was.”

During the siege, hostages had been forced to display an Islamic flag, igniting fears of a jihadist attack.

Australia, a staunch ally of the US and its escalating action against Islamic State in Syria and Iraq, has been on high alert for attacks by home-grown militants returning from fighting in the Middle East.

News footage showed hostages holding up a black and white flag. The flag has been popular among militant groups such as Islamic State and Al Qaeda.

At least five hostages were released or escaped yesterday, with terrified cafe workers and customers running into the arms of paramilitary police.

The incident forced the evacuation of nearby buildings and sent shockwaves around a country where many people were turning their attention to the Christmas holiday following earlier security scares.

In September, anti-terrorism police said they had thwarted an imminent threat to behead a random member of the public and days later, a teenager in the city of Melbourne was shot dead after attacking two anti-terrorism officers with a knife.

The siege cafe is in Martin Place, a pedestrian strip popular with workers on a lunch break, which was revealed as a potential location for the thwarted beheading.

In the biggest security operation in Sydney since a bombing at the Hilton Hotel killed two people in 1978, major banks closed their offices in the central business district and people were told to avoid the area.

Muslim leaders urged calm. The Australian National Imams Council condemned “this criminal act unequivocally” in a joint statement with the Grand Mufti of Australia.