Sydney - An armed assailant was holding an unknown number of hostages in a central Sydney cafe on Monday, shutting down Australia's largest city and raising fears it could be an attack by Islamist militant sympathisers.
Six hours after the mid-morning siege began, television showed three hostages running out of the Lindt chocolate cafe and sheltering behind a heavily armed, black-clad Swat team.
Police said it was not known exactly how many more hostages remained in the cafe but it was not as high as the 30-40 that had been reported earlier. The remaining hostages were being held by at least one armed assailant, police said, but did not rule out that others could be involved.
Prime Minister Tony Abbott, who has warned of militant plans to strike Australian targets, said there were indications the hostage situation at the cafe was politically motivated.
"This is a very disturbing incident. I can understand the concerns and anxieties of the Australian people," Abbott told reporters in Canberra, without providing any information on the siege.
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Australia, a staunch ally of the United States and its escalating action against the Islamic State of Iraq and Syria (ISIS), is on high alert for attacks by home-grown militants returning from fighting in the Middle East.
"We have moved to a footing that would be consistent with a terrorist event," Andrew Scipione, police commissioner for the state of New South Wales, told reporters in Sydney.
The cafe was directly opposite a commercial television studio and footage earlier showed several people inside the cafe standing with their hands pressed against the windows.
Pictures showed a black and white flag similar to those used by ISIS militants in Iraq and Syria being held up by what appeared to be a staff member and another woman. Local media reports said the flag was the Shahada, a general expression of faith in Islam, a translation of which is: "There is no god but Allah; Muhammad is the Messenger of Allah."
The incident forced the evacuation of nearby buildings in Sydney's central business district and sent shockwaves around a country where many people have started to turn their attention to the approaching Christmas festive season following earlier security scares.
In September, Australian anti-terrorism police said they had thwarted an imminent threat to behead a random member of the public and days later, a teenager in Melbourne was shot dead after attacking two anti-terrorism officers with a knife.
Evacuating by ladder
Dozens of heavily armed police surrounded the cafe in Martin Place after the siege began around 09:45 local time. The area is home to the Reserve Bank of Australia, commercial banks and close to the New South Wales state parliament.
"I walked up to the door and then everyone was sitting down and the door's locked which is pretty weird because it's never locked and there was one guy walking around with a hat and a beard," a man who identified himself as Bruno, a worker at the cafe, told the Australian Broadcasting Corp, referring to the suspected assailant. He said he then turned away.
A couple of hundred people were being held back by cordons and a police SWAT team and the fire brigade's hazardous unit were on the scene, a Reuters witness said.
Several hours into the siege, police led about two dozen people out of a building opposite the cafe and through the cordon. Others were evacuated from the building above the cafe by ladder, television pictures showed.
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Earlier, Lindt Australia Chief Executive Steve Loane told Sky Business there were about 10 staff working at the cafe and "probably 30 customers" although he said that figure was an estimate.
The Reserve Bank of Australia said staff had been locked down inside the building, and were all safe and accounted for.
The nearby US consulate was also evacuated, according to an embassy spokesperson, along with the Sydney Opera House. Tourists were being let back into the world-famous venue by early afternoon.
Banks and shops close
Major banks closed their offices in the central business district and people were told to avoid the area. Shops in a four block radius were shut, leaving large parts of the CBD all but deserted by mid-afternoon.
Traders in currency markets said the hostage news may have contributed to a dip in the Australian dollar, which was already under pressure from global risk aversion as oil prices fell anew.
Ray Hadley, a popular radio jockey, said he had been contacted by a hostage and could hear the suspected gunman issuing orders in the background. He said he did not talk at any length to the hostage but police said declined to comment on his claim.
Concerns about an attack in Australia by radical Islamists have been growing for more than a year, with the security agency raising its national terrorism public alert to "high" in September.
That month, a spokesperson for ISIS urged supporters in Western nations, including Australia, to attack civilians or military personnel at home.