One armed man is holding an undisclosed number of hostages in a siege in Sydney, police said on Monday, adding that it was yet to be deemed a terrorism event.

"I can confirm for you that we have an armed offender in the premises holding an undisclosed number of hostages in the city, in the Martin Place area," New South Wales state police commissioner Andrew Scipione told a press conference.

He added that no contact had yet been madewiththe man.

Martin Place in the central business district was evacuated as scores of armed police surrounded the Lindt chocolate cafe, with TV pictures showing a flag -- black with white Arabic writing -- held to a window by customers.

It appears to be theshahada, or profession of faith in Islam, and says: "There is no god but Allah; Mohammed is the Messenger of Allah."

"We have not yet confirmed this is a terrorism related event," said Scipione.

"We are dealing with a hostage situation with an armed offender and dealing with it accordingly. We are ready to escalate should we need to.

"We want the matter resolved peacefully and we will do all we need to do to ensure that," he added.