A group of people react after they placed floral tributes amongst thousands of others near the cafe in central Sydney yesterday.

AFP/Sydney

A giant sea of flowers was laid at a makeshift memorial near the scene in the heart of Sydney’s financial quarter, where Muslim community leaders joined their fellow citizens in mourning the two victims of Monday’s cafe siege.

Prime Minister Tony Abbott conceded that the dead gunman, identified in reports as 50-year-old refugee Man Haron Monis, had evaded greater scrutiny despite being accused of serious crimes including sexual offences and abetting in murder.

“Decent, innocent people got caught up in the sick fantasy of a deeply disturbed individual and we have seen the consequences of this play out over the last 36 hours,” Abbott told reporters.

“How can someone who has had such a long and chequered history not be on the appropriate watch lists and how can someone like that be entirely at large in the community?” he said.

“These are questions that we need to look at carefully and calmly and methodically to learn the right lessons and to act upon them. That’s what we’ll be doing in the days and weeks ahead.”

Emotions were raw as Australia struggled with the news that two hostages were killed when the 16-hour standoff reached a dramatic climax in the early hours of yesterday, as police commandos stormed the Lindt eatery, leaving Monis also dead.

It was not entirely clear how the hostages died although reports said that cafe manager Tori Johnson, 34, was shot as he tried to wrestle a shotgun out of Monis’ hands. The other victim, mother-of-three Katrina Dawson, 38, was said to have been killed as she tried to shield a pregnant friend.

At a prayer service in St Mary’s Cathedral near the Lindt chocolate cafe, Archbishop Anthony Fisher said the “heart of our city is broken by the deaths of two innocents”.

“These heroes were willing to lay down their lives so others might live,” he said.

Six other hostages were wounded, including three women with gunshot wounds, among them a 75-year-old. Two pregnant women were taken to hospital as a precaution.

Abbott said the hostage-taker, who at one point unfurled an Islamic State flag at the window of the cafe, “had a long history of violent crime, infatuation with extremism and mental instability”.

“As the siege unfolded... he sought to cloak his actions with the symbolism of the ISIL death cult,” he said, referring to the Islamic State group, while praising police for their response “to this brush with terrorism”.

The man was on bail for a series of violent offences, officials said.

New South Wales Attorney-General Brad Hazzard admitted there were serious questions over why he was free after being charged with being an accessory to his ex-wife’s murder and other offences.

State Premier Mike Baird said: “We are all outraged that this guy was on the street.”

The Muslim community, which condemned the hostage-taking and the use of the flag, won sympathy from ordinary Australians on its handling of the crisis.

Flags on all federal and New South Wales state buildings flew at half mast, while condolence books were opened.

The pre­-Christmas siege of the Lindt chocolate cafe began Monday morning and triggered a massive security lockdown in the bustling financial district as hundreds of police surrounded the site.

The gunman forced hostages to make videos with demands during the standoff, including that Abbott call him and that an Islamic State flag be delivered.

Monis’ former lawyer Manny Conditsis said the public could be assured it was not the work of an organised terrorist group.

“It’s not a concerted terrorism event or act. It’s a damaged­goods individual who’s done something outrageous,” he said of a man who arrived in Australia as a refugee in 1996. Australia has been on high alert in recent months with the government raising concerns that citizens who have fought alongside jihadists in Iraq and Syria could return home radicalised and carry out “lone wolf” attacks.

The government in September raised its terror threat level and police conducted large­scale counter­terror raids across the country. Only two people were charged.