Here are 10 developments in this big story:
The Sydney police said at least one armed offender was holding hostages at the Lindt Chocolate cafe in Martin Place, a major shopping and pedestrian thoroughfare near the Sydney Opera House in the central business district of the city.
Terrified customers were seen in TV footage pressed against a window, holding a flag with writing that appeared to be the shahada, or profession of faith in Islam, and said: "There is no god but Allah; Mohammed is the Messenger of Allah."
Hours later, some people were seen running out of the side entrance of the cafe.
Senior Sydney Police officer Catherine Burn said "no more than 30 hostages" were being held at the cafe. She said police negotiators "have had contact and continue to have contact" with the person holding the hostages.
Major landmarks including the Sydney Opera House have been evacuated. Banks have shut down their offices in the area. Helicopters are hovering above as a large number of heavily armed personnel were holding crowds back.
Prime Minister Tony Abbott, who has warned of militant plans to attack Australian targets, held a meeting of the cabinet's national security committee for a briefing on the hostage situation.
The US has evacuated its Sydney Consulate, which is located near the Lindt cafe, and issued an emergency warning to its citizens in Sydney. The Indian consulate has also closed down as a precautionary measure.
The hostage crisis unfolded just as the police announced a man had been arrested in Sydney on alleged terrorism offences as part of ongoing investigations into plans for an attack on Australian soil.
Australia, which is backing the US and its escalating action against Islamic State in Syria and Iraq, is on high alert for attacks by radicalised Muslims or by home-grown fighters returning from the conflict in the Middle East.
Prime Minister Narendra Modi tweeted, "The incident in Sydney is disturbing. Such acts are inhuman & deeply unfortunate. I pray for everyone's safety."