Sydney Cafe Under Siege

Hostages are being held inside a cafe in Sydney's Martin Place.

The faces of customers and workers have been seen pressed up against a shop window of the Lindt Chocolat Cafe.

Sky News has learned there are two or more gunmen inside the cafe.

It says they believe there are 13 hostages.

An Islamic flag - black with white writing on it - has been held up to the glass.

In a chilling drama unfolding in the city centre, Martin Place has been shut down and scores of police are surrounding the cafe.

The area around the cafe has been cordoned off to about 150 metres with specialist police operations poised outside the shop.

Workers who are trapped in buildings inside the police cordon have been told to stay away from the windows.

There are about 200 bystanders between Martin Place and Castlereagh Street watching anxiously.

Police have closed off Martin Place between Macquarie and Elizabeth streets, and Martin Place train station has been cleared.

Martin Place has several prominent buildings, including Premier Mike Baird's office, the Reserve Bank, Westpac Bank and Commonwealth Bank headquarters as well as the US embassy and Network Seven.

NSW government offices, including Premier Mike Baird's, are also in the vicinity.

Australian Prime Minister Tony Abbott has offered federal support to NSW to deal with the siege.

Mr Abbott met the national security committee of cabinet as the siege unfolded around 10am (AEDT).

He says this is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner.

Ray Hadley, a 2GB radio station host, claimed the hostage-takers want to talk to Australian Prime Minister Tony Abbott live on air, the Guardian Australia reported.

A reporter for the newspaper at the scene said a man who appeared to be a priest was escorted into the cafe.

Arrest 200m from scene

A man has been handcuffed 200 metres from the Martin Place cafe siege in central Sydney.

It's believed 13 people remain under siege in the Lindt Cafe at Martin Place.

They've been held hostage since just before midday.

There are reports a police officer has his foot on what appears to be a small black handgun.

Nine News Perth has reported they understand the arrests is not related to the current situation.

Radio station takes threatening call from Martin Place

A prominent Sydney radio station has received a call from Martin Place.

Sky News reporter Cameron Price says it's believed the caller is one of the gunmen inside the Lindt Cafe.

"He has made threats and also demands. Now we cannot confirm these reports at this stage, but we understand that authorities are taking this call extremely seriously."

The hostage-taker reportedly made threats to the radio station of other explosives around Sydney.

Ray Hadley, a 2GB radio station host, claimed the hostage-takers want to talk to Australian Prime Minister Tony Abbott live on air, the Guardian Australia reported.

A reporter for the newspaper at the scene said a man who appeared to be a priest was escorted into the cafe.

Abbott releases statement

Mr Abbott has issued a statement, describing the siege situation as "deeply concerning" and saying the National Security Committee of Cabinet has convened for briefings.

"New South Wales Police and the Australian Federal Police are currently responding to a reported hostage-taking incident in Martin Place in Sydney," the Australian prime minister said.

"I have spoken with NSW Premier Mike Baird and offered him all possible Commonwealth support and assistance.

"The National Security Committee of Cabinet has also convened for briefings on the situation.

"This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner."

New South Wales Premier Mike Baird has released a statement saying his "thoughts and prayers" are with those affected.

"I have spoken to the Police Commissioner Andrew Scipione and have full confidence the NSW Police are working effectively to resolve the situation," he said.

Newsroom evacuates

The Seven Network's Martin Place studio in Sydney's CBD has been evacuated as a hostage drama unfolds at a nearby cafe.

Seven's coverage of the siege at the Lindt Chocolat Cafe is being telecast via Melbourne.

The Martin Place studio is Seven's main newsroom and home to breakfast show Sunrise and The Morning Show, which was on air when news of the siege broke about 9.45am (AEDT).

It's directly opposite the Lindt cafe.

It's unknown if any Seven staff are among the hostages.

A Seven representative says one of its news reporters, who's an expert in terrorism, has identified the flag being held up in the window.

He says it's believed to be an al-Qaeda flag, adding Martin Place has become a ghost town.

Morning terror raids

An operation in Sydney's northwest ended with two men in custody on suspected terrorism-related offences this morning.

The Australian Federal Police have confirmed a 25-year-old Beecroft man has been arrested by the NSW Joint Counter Terrorism Team, and the other man is believed to have been taken into custody earlier.

The AFP says the arrests are part of continuing investigations into the planning of a terrorist attack on Australian soil.

For more up-to-date information, head to NewstalkZB