The man responsible for the siege in Brighton that left two men dead and three policemen shot was being investigated by police over terror links.
Yacqub Khayre had also taken a female escort hostage in the dramatic siege in the Melbourne bayside suburb on Monday night.
The officers killed the 29-year-old gunman during the shootout. Two were later taken to hospital with gunshot wounds, while the other officer was treated at the scene.
Islamic State has claimed responsibility for the attack, Reuters reports.
"The attack in Melbourne, Australia, was carried out by a soldier of the Islamic State in response to the call for targeting the subjects of the coalition states," the group's Amaq propaganda agency said.
IS blamed the attack on Australia's membership of the US-led coalition against the militant group.
Police Chief Commissioner Graham Ashton confirmed the identity of the gunman who was from Roxburgh Park. He said the two police officers who were shot suffered non-life threatening injuries.
Mr Ashton said the woman had arrived at the apartment as part of an escort service. The other victim who shot dead was a Chinese national.
Mr Ashton said the gunman had been complying with parole. Police have executed a warrant at a Roxburgh Park address. Mr Ashton said Khayre lived with his mother.
Court documents reveal that Khayre previously had an affinity with al-Shabbab, the extremist group from his native Somalia.
Police believed he became radicalised after attending Preston mosque along with other men who were also charged in relation to a plot targeting the Holsworthy army barracks in Sydney's south-west. Khayre was acquitted over 2010 plot while three of his co-accused were found guilty.
It was alleged Khayre had also travelled to Somalia as part of preparation for the plot.
Al-Shabbab is yet to declare a partnership with either Islamic State or al Qaeda, but has reportedly been losing fighters to both extremist groups.
Khayre was jailed for five years and six months for a violent home invasion in 2013.
A court heard Khayre was high on ice and armed with a knife when he broke into a Dallas home and assaulted a woman and her father.
He pleaded guilty to charges of aggravated burglary, theft, intentionally causing injury, recklessly causing injury, and giving a false name.
Khayre's alleged involvement in a previous terror plot continues a trend which has troubled senior law enforcement figures; how to deradicalise those detected in operations Pendennis and Neath.
Many of those charged in relation to either of those plots pledged allegiance to Islamic State, and have either travelled to the Middle-East to join the caliphate, or remain on watchlists in Australia, having had heir passports cancelled. Those who remain in Australia have been repeatedly linked to the radicalisation of a new wave of extremists.
Bay Street remains closed on Tuesday morning and there is a heavy police presence in the area.
The Seven Network took a phone call in its Melbourne newsroom at 5.41pm from a woman who said she was in a hostage situation before man came on the line saying "This is for IS, this is for al-Qaeda".
Channel Seven chief-of-staff Nicole Bland answered the call when it came through to the newsroom switchboard about 5.40pm.
"I heard a woman on there, clearly distressed," she told radio station 3AW. "I couldn't understand what she was saying. She was speaking very quickly and I kept asking her to repeat herself."
"Then a man's voice came across in the background and said 'this is the Brighton hostage'. I thought maybe it was a witness and we could use the footage.
"Then a man's voice came across very clearly and said 'this is for IS, this is for al-Qaeda."
Ms Bland said she had "every reason" to believe the caller was the man who was shot dead by police. She said he spoke calmly and with an accent.
"He obviously wanted his message out there and wanted it broadcast."
Police are investigating whether the incident is terror-related and counter-terror investigators were on the scene last night.
The suspect was shot dead by police in a volley of gunfire after the woman was taken hostage at the Buckingham Serviced Apartments in Bay Street.
The bomb squad was investigating suspicious packages found in the apartment block. A number of people were trapped inside apartments at the height of the siege.
Dozens of residents who were returning home from work and live near the apartment block were turned away and told to come back on Tuesday morning.
Ms Bland said police told Channel Seven the phone call had come from within the apartment building.
It is understood a man killed by the gunman was an employee of the serviced apartments. The female hostage is also believed to have worked at the apartments.
Police arrived at the apartment block to find a man's body in the foyer while the suspect was holed up in one of the apartments with the woman.
Dozens of gunshots rang out just after 6pm in Bay Street with crowds of people fleeing and taking refuge in a nearby Coles supermarket.
About 6.20pm police removed what appeared to be a body on a stretcher from the apartment block.
Deputy Police Commissioner Andrew Crisp said police were investigating the relationship between the gunman and the female hostage, who is aged between 20 and 30.
Two of the shot police officers were taken to hospital and another treated at the scene, police said. None has life-threatening injuries.
Jack Reid, 20, of Brighton said he and his friends had run for their lives after hearing gunfire.
"I was standing on the corner across the road," he said.
"I saw police pull out their guns, I heard about three dozen gun shots. I got really scared and ran across the road. Police were telling everybody to get into the Coles supermarket so me and mates just ran."
Kate Forster said she saw fire crews hiding behind their truck, empty cars left in the middle of the road and people stuck in the building next door to the siege.
"Can see them in the window looking distressed," she said from the scene.
Police were called to the serviced apartments at 4pm after reports of an explosion.
Police then tried to negotiate with a man in one of the apartments who had taken a woman hostage.
Graeme Hisgrove said he, his wife and teenage children had to hit their lounge room floor because of a volley of gunfire coming from the serviced apartments next to their house just after 6pm.
"We've all hit the deck on our lounge floor," Mr Hisgrove said.
He said tactical police were inside his property against the fence line.
Mr Hisgrove said he heard a single gunshot on the other side of his fence between 4 and 4.30pm.
"It was one single bang. It was massive," he said.
He went out the front of his house and police had already surrounded the premises.
He said he and his family were now "waiting it out" inside their home.
"We're a bit on edge," he said.
Mandy Sharp was at Brighton Swim School Aquatics on Bay Street with her two children when police evacuated about 30 people about 5pm.
Children in the middle of swimming classes were taken out of the pool as families and staff fled the scene.
Ms Sharp said people could smell the gunpowder in the air.
"We were all a bit nervous and a bit scared, she said. "We were trying to keep calm for the kids though."
Ms Sharp returned to the scene about 10pm to pick up her car but was told by police she would have to wait until Tuesday morning, with parts of Bay Street still blocked off.
Antonia Waite, who lives off Bay Street, said her daughter was in the front yard when police, armed with "big guns", drove past about 4.30pm and told her to "go inside and lock the doors".
A number of callers said they saw undercover armed police with bulletproof vests running up the street.
One person said police had arrested a person and who was handcuffed at a bus stop in Bay Street.
Another caller, Georgie, said she had seen police officers on their hands and knees with guns drawn at the entrance to the apartment block.
- with Reuters