At the time of going to press Mr Coulton said residents should have faith in the experienced authorities dealing with the siege.

"Earlier this year, based on advice from intelligence agencies, the government increased the terror alert level from 'medium' to 'high,'" he said.

"Our thoughts remain with the individuals who have been caught up in the siege and their families.

"Many people will know individuals who work in Martin Place every day.

"We must trust the professionals who have been trained to deal with these extremely difficult situations."

Yesterday Member for Dubbo and Deputy Premier Troy Grant was working from NSW parliamentary executive offices, on Martin Place, a spokesperson for Mr Grant said.

"The Deputy Premier is fulfilling his role as required by counter terrorism protocol as part of the ongoing situation in the Sydney CBD," the spokesperson said.

"His thoughts and prayers are with those affected and their family and friends."

Reportedly about 20 people were held hostage at the Lindt Chocolate Cafe in Martin Place, within the Sydney CBD yesterday.

A NSW Police spokeswoman said officers were called to the shop about 9.45am yesterday.

Terrified hostages could be seen with their hands in the air and pressed up against the windows and a black flag with Arabic writing was held up.

The flag appears to be a Shahada flag, not an Islamic State flag, but is associated with Islamist and jihadist movements.

NSW Deputy Commissioner Catherine Burn has confirmed three hostages managed to escape the Martin Place siege at about 3:30pm.

A woman is believed to have raised the alarm at 9.44am when she saw a man outside the cafe carrying a blue sports bag with a gun inside.

There are reports that there were be two gunman inside the cafe, although police have not confirmed this.

The cafe is right in the middle of the banking and retail district, and is usually packed with Christmas shoppers at this time of year.

Heavily armed police surrounded the building and the CBD was in lockdown.

Thousands of workers across the city have been sent home early and some of the city's major buildings evacuated.

They include the Opera House, the State Library, Channel Seven, the NSW parliamentary executive offices, the NSW Supreme Court's criminal courts, the Downing Centre, and several city legal chambers.

Office workers as far away as Circular Quay reported that they were being sent home just before midday.

Trains between Central and Bondi Junction were initially stopped, but the Transport Management Centre said services resumed about 10.45am.

However Martin Place train station was closed and trains were not stopping there.

It was reported the airspace above the Sydney CBD had been shut down, but a spokesman for federal Transport Minister Warren Truss said: "There are choppers in the air and air traffic is being rerouted."

He said the National Security Committee of Cabinet has convened for briefings on the situation.

It has been warning for months that a terrorist attack in Australia could happen.

Just before 12.30pm, police tackled a man to the ground about 200 metres from the cafe and a police officer was seen with his foot on what appeared to be a small black handgun. However police later said the arrest was not related to the ongoing siege.

A Public Information Inquiry Centre (PIIC) has been opened to take calls from members of the public about a police operation in Sydney's Martin Place today.

For all general information about the incident, including information about other government services, call 1800 227 228.