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At least one gunman is holding staff and customers hostage at a cafe in the Australian city of Sydney.

Hundreds of armed police have sealed off the normally busy Martin Place in the central business district.

Earlier, at least three people were seen inside the Lindt cafe with their hands up against a window, and holding up a black flag with Arabic writing.

Australian Prime Minister Tony Abbott has described the "terrifying" incident as "deeply concerning".

About six hours into the siege, three people were seen running from the building housing the cafe. Two more people followed about an hour later. The circumstances of their exit are not clear.

"We will work with these people to figure out more information. We do not have information to suggest that anyone is harmed at this stage," said New South Wales Police Deputy Commissioner Catherine Burn after the first three came out.

Police negotiators were now in contact with gunman, she added.

Mr Abbott said it was not yet clear who was behind the incident but that it could be politically motivated.

"I can think of almost nothing more distressing, more terrifying than to be caught up in such a situation, and our hearts go out to these people," he said.

Speaking in Canberra, Mr Abbott added: "Australia is a peaceful, open and generous society - nothing should ever change that and that's why I would urge all Australians today to go about their business as usual."

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Eyewitness

Siouxsie Ford, a partner at a law firm, is inside her office near Martin Place, which has been locked down by police.

She told the BBC: "There's a large media presence around the security perimeter, an ambulance, a fire truck and police cars.

"We are very concerned about what's going on inside the cafe. People in my office are watching out of the windows, or watching what's happening on TV.

"The building management has been broadcasting alerts. We were told the lifts and doors were locked. We haven't been told when exactly we can leave, but if there is a window of opportunity we can leave immediately and so we are on standby."

New South Wales Police Commissioner Andrew Scipione said the situation was not being treated as a terror incident, but confirmed there was "an armed offender in the premises holding an undisclosed number of hostages".

He said the situation was contained in Martin Place - dismissing various reports of other incidents around the city - and that police were "doing all we can to bring this to a peaceful outcome".

The BBC's Jon Donnison in Sydney says an enormous police operation is in place, on a scale few Sydney residents will have seen before.

The incident began as people were arriving for work in Martin Place on Monday morning.

Witnesses saw a man with a bag and gun walk into the Lindt chocolate shop and cafe. Police shut down the area, closing roads and moving people away. The Martin Place station was also closed.

Lindt said about 10 employees and 30 customers were thought to be inside. Nearby offices were evacuated and police asked people to remain indoors and away from open windows.

In a statement on Facebook, the company said it was "deeply concerned over this serious incident".

An armed man wearing a backpack and a bandana could be seeing walking around inside the cafe.

Television footage showed at least three people, thought to be employees of the cafe and who were visibly distressed, holding a black sign with the Islamic creed written on it up to the window.

BBC security correspondent Frank Gardner said the flag was similar to but not the same as that used by the Islamic State militant group in the Middle East.

Martin Place is home to the state premier's office and the headquarters of two of the nation's largest banks. The state parliament house is also only a few streets away.

Australia raised its terror threat level in September, amid fears over the effect on domestic security of those fighting for and supporting the Islamic State.

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Australia's terror threat timeline

21 Jul: Officials say Australian suicide bomber behind Iraq blast; concern grows over the number of Australians fighting for Islamist militant groups in the Middle East and the effect of them and their supporters on domestic security.
12 Sep: Australia raises terror threat level from medium to high, for the first time since the system was introduced in 2003.
14 Sep: Prime Minister Tony Abbott commits 600 troops to fight against Islamic State, as part of a multilateral effort.
18 Sep: Australia carries out what it calls its biggest counter-terrorism raid; Mr Abbott later says this was linked to an alleged plot by Australia-based individuals to kill a randomly selected member of the public.
29 Oct: New laws designed to stop Australians fighting in overseas conflicts are passed by the senate.