Hundreds of armed police have sealed off the normally busy Martin Place in the central business district.
At least three people have been seen inside the cafe with their hands up against a window, and holding up a black flag with Arabic writing.
Australian Prime Minister Tony Abbott has described the incident as "deeply concerning".
He said it was not yet clear who was behind the incident but that it could be politically motivated, and that the National Security Committee had been briefed.
"I can think of almost nothing more distressing, more terrifying than to be caught up in such a situation, and our hearts go out to these people," he said.
About six hours into the siege, three people were seen running from the building. The circumstances of their exit from the building are not clear. (+ BBC videos) » | Monday, December 15, 2014
