"We are now treating this as a terrorism event," said Victoria Police Chief Commissioner Graham Ashton, adding that the suspect is "someone that is known to us" and had travelled to central Melbourne in a 4x4 packed with gas bottles.
Ashton said the attacker -- who was shot by police and later died in custody -- was known by the authorities because of family connections and had been in Australia for decades.
The counter-terrorism command has taken a lead role in the investigation. One person was killed in the attack and two others were injured.
Police officers who apprehended the suspect are being treated for cuts and scrapes and are not thought to be in a serious condition.
Ashton said the authorities do not see any ongoing threat related to the attack.
The knife-wielding attacker killed one person and injured two others in a rush hour stabbing rampage in downtown Melbourne yesterday, before being shot and captured by police.
Witnesses said the man began attacking pedestrians near a pickup truck apparently belonging to the attacker which had exploded into flames.
Australian police said one person died at the scene and another two others were being treated for their injuries.
Witness footage showed police struggling for at least a minute to corral a large man wearing a dark tunic as he lunged, slashed and stabbed wildly at two officers.
At least two members of the public bravely tried to help police. One man was armed with a cafe chair while another -- swiftly dubbed an "Aussie hero" on social media -- repeatedly tried to ram the suspect with an empty metal shopping cart.
But as the attacks continued unabated, eventually one officer opted for lethal force, shooting the suspect in the chest.
"A man was arrested at the scene and has been taken to hospital under police guard in a critical condition," police Superintendent David Clayton said.
Police warned people to avoid the area and created a three-block-wide exclusion zone as the bomb squad was dispatched to secure the area and examine the vehicle after the fire was extinguished.
Officers said they "are not looking for anyone further at this early stage". "The exact circumstances are yet to be determined... The area has been cordoned off," police said, as they called for "anyone with information or who witnessed the incident is asked to go to Melbourne West Police Station to make a statement".
Forensic investigators combed through the scene late yesterday, where the dead victim’s body lay covered in a white plastic sheet. — AFP/VNS