One knifed to death in Oz terror attack ... IS claims RESPONSIBILITY

MELBOURNE: A man set a car on fire and stabbed three people, killing one of them, before being fatally shot in the Australian city of Melbourne, in an attack claimed by the Islamic State terror group to target foreigners.

Victoria Police Chief Commissioner Graham Ashton said the man who stabbed three members of the public and attacked police officers has died in a hospital.

"We are now treating this as a terrorism event," said Ashton, adding that the suspect is "someone that is known to us".

''I'm not at liberty at this point to disclose the identity of that person. But we are, as I say, having counter-terrorism investigations under way. The person is known to police. He's known to police mainly in respect to relatives that he has that are certainly persons of interest to us. He is someone that, accordingly, is known to both Victoria Police and federal intelligence,'' Ashton said.

The man was shot after confronting police officers on a busy city street, authorities said. He was taken into custody in a critical condition. He succumbed to the gunshot wounds in the Royal Melbourne Hospital.

"The perpetrator of the operation... in Melbourne... was an Islamic State fighter and carried out the operation... to target nationals of the coalition" fighting the Islamic State, the terror group's propaganda outlet, Amaq, said.

Officers were initially called to reports of a car fire near Bourke Street, a busy thoroughfare, at about 4.20pm local time.

"As they got out of the car, they were confronted by a male brandishing a knife and threatening them," Supt David Clayton told reporters.

Footage captured the shocking scenes as a car went up in flames and police shot the knife-wielding man in the chest after he confronted officers as they arrived at the scene.

Prime Minister Scott Morrison has said Australians will "never be intimidated by these appalling attacks". Victoria Premier Daniel Andrews has called the attack an "evil and terrible thing".