A lone gunman brandishing an Islamic flag kept terrified staff and customers captive into the early hours of Tuesday at a central Sydney cafe after five hostages managed to flee for their lives.

The hostage-taker was named by ABC television and other media as an Iranian-born "cleric" called Man Haron Monis. They published a photo of him sporting a beard and a white turban.

The pre-Christmas siege of the Lindt chocolate cafe began Monday morning and triggered a continuing security lockdown in the heart of Australia's biggest city as hundreds of armed police surrounded the site.

Monis was "on bail for a string of violent offences", said ABC, the national broadcaster.

Monis's former lawyer Manny Conditsis said the public could be assured that the siege was not the work of an organised terrorist group.

"This is a one-off random individual," he told the ABC. "It's not a concerted terrorism event or act. It's a damaged-goods individual who's done something outrageous."

The Australian newspaper called him a "self-styled sheik" who had sent offensive letters to the families of dead soldiers and was on bail on charges of being an accessory to the murder of his ex-wife.

It said the 49-year-old, who arrived in Australia as a refugee in 1996, lives in Sydney’s southwest and was "understood to be a fringe Islamist".

Police did not deny the reports. They said they knew who the hostage-taker was but would not identify him with operations continuing.

The government said there was no clear motivation. But the Islamic flag appeared to be one commonly used by jihadist groups bearing the shahada, or profession of faith in Arabic script -- "There is no God but Allah; Mohammed is his messenger."

With police attempts to negotiate continuing through the night, videos emerged online of tired-looking captives repeating their hostage-taker's demands. YouTube later took the footage offline.

The man, reportedly armed with a shotgun, made a series of demands through Australian media but they were removed after police requested they not be made public.

Australia has been on high alert with the government raising concerns that citizens who have fought alongside Sunni jihadists in Iraq and Syria could return home radicalised and carry out "lone wolf" attacks.

Prime Minister Tony Abbott convened a national security meeting to deal with the "disturbing" development.

Some six hours into the siege, three men emerged from the cafe and ran for their lives. Around an hour later two distraught women employees also fled. It was not clear if they escaped or were released.

One was barista Elly Chen whose sister Nicole said on Facebook: "Yessss I finally see you. I'm so glad you’re safe!!!!"

Among those left inside was an employee of Indian IT giant Infosys, the company said, as the leaders of India, Britain and Canada tweeted their concern. US President Barack Obama was briefed on the crisis, the White House said.

Negotiators "have had contact and continue to have contact" with the armed man holding the hostages, New South Wales state deputy police commissioner Catherine Burn said. "We do not have information to suggest that anyone is harmed at this stage," she added.


'Gunman rotating hostages'

Channel Seven reporter Chris Reason, whose office is opposite the cafe, tweeted: "From inside Martin Place newsroom, we've counted around 15 hostages -- not 50 -- mix of women, men, young, old - but no children."

Reason added: "We can see gunman is rotating hostages, forcing them to stand against windows, sometimes 2 hours at a time."

Journalist Chris Kenny, who was in the Lindt cafe just before the siege began, said he understood the automatic glass sliding doors had been disabled.

He added that a woman who tried to get in as he was leaving saw someone with a weapon who told those inside "to put up their hands".

The scene of the drama, Martin Place, is Sydney's financial centre and houses several prominent buildings, including the New South Wales parliament, the US consulate, the country's central bank and the Commonwealth Bank of Australia.

Many shops and offices in the area shut early due to the scare, with only a trickle of people walking along usually bustling streets.

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

"It's sad to think this is my home and that it could happen anywhere," said onlooker Rebecca Courtney.

More than 40 Australian Muslim groups jointly condemned the hostage-taking and the use of the flag, which they said had been hijacked by "misguided individuals that represent no one but themselves".

The government in September raised its terror threat level and police conducted large-scale counter-terror raids across the country. Only two people were charged.

More than 70 Australians are believed to be fighting for Islamic militants in Iraq and Syria. At least 20 have died.