Staff and customers at a Lindt cafe in Sydney, Australia, are being held hostage by a gunman.

The Lindt cafe in the city centre is surrounded by armed police. Officers have made contact with the gunman.

Five people have been seen running from the building. It is not clear how many remain inside. A black Islamic flag has been displayed at the window.

Australia’s PM Tony Abbott said it was “profoundly shocking” that people were being “held hostage by an armed person claiming political motivation”.

He was speaking after chairing a meeting of the national security committee in Canberra.

Earlier Tony Abbott said: “Australia is a peaceful, open and generous society – nothing should ever change that and that’s why I would urge all Australians today to go about their business as usual.”

Senior police officers say they are on a footing “consistent with a terrorist event”.

The incident began as people were arriving for work in Martin Place on December 15. Witnesses saw a man with a bag and gun walk into the Lindt chocolate shop and cafe.

Lindt said about 10 employees and 30 customers were thought to be inside at the time. Nearby offices were evacuated and police asked people to remain indoors and away from open windows.

An enormous police operation is in place, on a scale few Sydney residents will have seen.

About six hours into the siege, three people were seen running from the building housing the cafe. Two more people followed about an hour later. It is not clear whether they escaped or were released.

New South Wales Police deputy commissioner Catherine Burn said: “Those people are now being assessed to make sure their health is okay and then police will talk to them.”

“Our approach is to resolve this peacefully. It might take a bit of time but that is our priority,” she added.

Police negotiators were in contact with the gunman, Catherine Burn confirmed. The suspect also contacted local media and reportedly issued demands.

In a statement on Facebook, Lindt said it was “deeply concerned over this serious incident”.

An armed man wearing a backpack and a bandana could be seeing walking around inside the cafe.

TV footage showed at least three people, thought to be employees and who were visibly distressed, holding up to the window a black flag bearing the declaration of Islamic faith, which reads: “There is no God but Allah, and Muhammad is his messenger.”

The flag is similar to those used by jihadist groups, but is different from the one used by Islamic State militants in the Middle East.

Martin Place is home to the state premier’s office and the headquarters of two of the nation’s largest banks. The state parliament house is also only a few streets away.

Australia – which has sent fighter jets to join the US-led coalition conducting air strikes against Islamic State in Iraq – raised its terror threat level in September.

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