Man killed, woman taken hostage after Melbourne apartment explosion

Australian police are investigating a possible terror attack after a man was killed and a woman held hostage in a Melbourne apartment.

Officers were called to the building in Brighton at around 4pm on Monday (local time) after reports of an explosion.

In the building's foyer they discovered a man's body, who they believe was shot.

A second man was allegedly holding a woman hostage in one of the apartments and was refusing to let her leave.

He opened fire on police officers when he ran from the building at around 6pm and was shot dead, police say.

Three officers were injured in the stand-off but are believed to recover, while the woman has been rescued.

Police have yet to identify the gunman and say they're not sure what his relationship with the hostage is.

They're now investigating whether the crime was terror-related.

During the siege, 7 News received a call from a male, with a woman heard screaming in the background.

"This is for IS, this is for Al-Qaeda," he told newsroom staff.

Police told 7 News they believe the call came from inside the apartment building and are now investigating whether or not the attack was linked to terror.

The shooter was already known to counter-terrorism police, according to the Herald Sun.

Nearby roads have been cordoned off and the public is asked to stay away.