It is one of the most popular cafes on a thoroughfare that is thronged at this time of year with festive shoppers, in addition to everyday office crowds and tourists.

But on Monday, a pre-Christmas nightmare played out inside the Lindt cafe on Sydney's Martin Place, while outside the crowds had evaporated, replaced by police lines and tension, as businesses shut early.

"It's kind of shocking for everyone," said local worker Goldie Jamshidi near the chocolate-themed cafe where a gunman had taken several people hostage, brandishing an Islamic banner above a Lindt store sign and the words "MERRY CHRISTMAS".

"I came to work and then I found out that this incident had happened," she said.

By the evening five people had fled the building, two of them young women wearing Lindt aprons who raced out and into the arms of police officers.

Officers wearing black SWAT-style uniforms had earlier taken up position, eyes staring down rifle sights. Some onlookers took photos to post on social media, others shook their heads in disbelief.

Australia had long seemed far removed from the hubs of Islamist extremism. But the Lindt hostage-taker's use of the Islamic banner lent weight to suspicions that the threat had come home to roost despite a stepped-up security posture of late.

The government in September raised its terror threat level and police conducted raids across the country, as authorities fretted that dozens of Australians who have fought alongside jihadists in Iraq and Syria could return home radicalised and inflict "lone wolf" attacks.

"It's kind of overwhelming, especially after the drama a few months ago about the talk of a beheading at Martin Place," said office worker Rebecca Courtney.

That referred to an order purportedly issued by the most senior Australian recruited by Islamic State for "demonstration killings" in Australia, including beheading a random member of the public.

Afghan-born Mohammad Ali Baryalei, reportedly a former nightclub bouncer and aspiring actor, was said by the Australian Broadcasting Corporation in October to have died in fighting overseas.

'It could happen anywhere'

At that time in October, the government urged young Australians not to become radicalised as it defended new "foreign fighter" legislation designed to prevent citizens from travelling overseas to take part in conflicts.

"It's sad to think this is my home and that it could happen anywhere," Courtney told AFP from close to the police cordon.

While the motives behind Monday's siege were not known, Prime Minister Tony Abbott said the signs pointed to a political dimension.

"All the shops around us are closed for safety," said Marian Chung, general manager of a tourist outlet selling stuffed kangaroos and koalas and which is a stopping point for organised tours.

"But we can't close as some of our customers are from overseas and they have bookings here."

At the nearby Sydney Opera House, where police swept the area earlier Monday, evening performances were cancelled.

In the days and weeks before Christmas, Sydney's shopping district usually takes on an extra vigour as people buy presents for the festive season. Martin Place, with its huge Christmas tree, is a magnet for families.

But Chung said she had lost about 30 percent of her usual revenue at her store, Kogaroo: Gift from Australia, on Monday because of the road and store closures as the city went into lockdown.

One business accused of profiteering from the hostage crisis was web-based taxi firm Uber, which is no stranger to controversy around the world.

Initially, Uber was said to have begun charging passengers four times regular fares with a minimum charge of Aus$100 (US$82) to leave Sydney's central business district. "What a shameful disgrace," wrote Twitter user Tyson Armstrong.

The company later issued a statement saying it "will be providing free rides out of the CBD to help Sydneysiders get home safely" and that it was "in the process of refunding rides".