Australian authorities are treating a two-hour siege at an apartment building in a Melbourne suburb as a "terrorism incident", but said the gunman appeared to have acted alone.

Armed police were called to the building in Brighton by neighbours. They and found one man dead and a gunman holding a woman hostage inside the building.

They tried to negotiate with the man, identified as Yacqub Khayre, 29, but he walked out of the building firing a shotgun.

Police returned fire and he was shot and killed.

Three police officers were wounded. The hostage was unharmed, police said.

During the incident, which unfolded on Monday, the local Seven Network television station received a phone call from a distressed woman who said she was involved in a hostage situation.

"We asked her more information, at that point a man came on the same line and said 'This is for [so-called Islamic State] IS, this is for al-Qaeda,'" Seven news director Simon Pristel said.

So-called Islamic State also later said it was behind the attack via online media, but police said they did not believe the claim was evidence the attack had been planned.

Victoria state Police Chief Commissioner Graham Ashton said the siege was being treated as a "terrorism incident" as a result, but that Khayre, a Somali refugee, appeared to have acted alone and not as part of any ongoing plot.

"There is nothing that we've found thus far that would suggest to us that this was anything that was ... planned or done in concert with others," Mr Ashton said.

Khayre was one of two men acquitted by a jury in 2010 of plotting a suicide attack in Sydney.

He served prison sentences for arson and violent crimes unrelated to extremism before being paroled in November, Mr Ashton said.