Hostages being held by a gunman in a Sydney cafe have been freed following a police operation.

Gunfire and explosions were heard as the police moved in to end the hostage crisis that had stretched for 16 hours.

Three people, including the hostage-taker were killed, police said. A police officer was also injured but was in a stable condition.

Andrew  Scipione,  New South Wales (NSW) police commissioner, commended the work of his department.

He said there had been 17 hostages in total.

Television images showed hostages streaming out of the Lindt Chocolate cafe. Some were taken out in stretches as ambulance sirens wailed.

The hostage crisis had begun early on Monday.

Australian media, quoting a police source, identified the hostage-taker as Man Haron Monis, an Iranian refugee with a criminal past.

"This is a very disturbing incident," Tony Abbott, Australia's prime minister, said hours after the hostage crisis started.

Abbott called the siege a "brush with terrorism".

"He had a long history of violent crime, infatuation with extremism and mental instability," the prime minister said.

"As the siege unfolded ... he sought to cloak his actions with the symbolism of the ISIL death cult."