A major police operation is underway at the Bay Street apartment complex, after reports of the explosion at 4 pm local time, reports the Australian Broadcasting Corporation.
The police also found the body of a man in the building and said it appeared that he was shot dead in the foyer area.
A Victoria state police spokesperson said officers were trying to negotiate with a man in one of the apartments. "Victoria Police specialist units are currently on scene. Roads are closed in the vicinity and we urge the community to avoid the area," the spokesperson said.
"I saw a couple of policemen hiding behind letter-boxes and one also sort of bobbing behind one of their police cars," a witness told the Australian Broadcasting Corporation. "It didn't look too good and all the streets are closed off around the area," the person said.