The gunman asked Craig Stoker, above: "Do you want me to shoot you too?"
Man in Islamic headband storms into Sydney cafe and takes up to 30 terrified people hostage, Kathy Marks and agencies report.
Father-of-four Craig Stoker had just bought a coffee at the Lindt Chocolat Cafe in Sydney's Martin Place when he walked out and bumped into the "crazy-eyed" man wearing a black T-shirt and headband and carrying a blue bag.
"Watch where you are f***ing going," Mr Stoker barked at the man.
"The bag bumped into me and there was something hard in it. He turned round and said, 'Do you want me to shoot you too?'" Mr Stoker said.
"I looked into his eyes and they were crazy. I was pretty freaked out."
The man walked into the cafe shortly afterwards, somehow locking or disabling the sliding doors so no one else entered. Inside were up to 30 people - staff and customers.
The morning had dawned sunny and warm. The city centre was thronged with tourists and Yuletide shoppers. In Martin Place, a wide pedestrian thoroughfare in the heart of the financial district, the lights on a giant Christmas tree winked at passersby.
Shortly after the gunman pulled out his weapon, TV cameras - Channel 7 is stationed opposite the cafe - captured the terrified faces of several customers and staff in brown Lindt aprons pinned against the front window, their arms in the air and pressed against the glass.
Two hostages held up a black and white flag that stated in Arabic: "There is no god but Allah" and "Mohammed is the messenger of God".
The mother of a young man trapped inside the cafe told 2GB her son had texted her, the Daily Telegraph reported. "Mum I'm in the Lindt cafe in Sydney."
Image 1 of 29: NSW Public Order and Riot Squad Police are seen outside the Lindt cafe in the central business district of Sydney. Photo / AAP
She said her "heart stopped". She sent a text back asking if he was okay. He replied: "I'm okay mum, can't talk."
The Guardian spoke to the fiance of one of the hostages. "She's the sweetest person ever who thinks about everyone," he said. "She took some of my old shoes and made me wash them and she gave them to a homeless guy. She just cares about everyone."
Journalist Chris Kenny was in Lindt about 20 minutes before the drama began. "I know the faces of the people who ... [were] sitting there enjoying a morning coffee," he said.
Kenny spoke to a woman who tried to enter the cafe soon after he left. She found the entrance closed.
Police secure the scene near Lindt Cafe, Martin Place, Sydney. Photo / Getty Images
"She said immediately she could see there was a weapon," he said. "The woman was quite frantic, but very clear what she was telling the police."
Some reports suggested the gunman had an explosive device - reports last night said he claimed to have four bombs, including two with him in the cafe.
Hundreds of police, some armed with automatic weapons, flooded the area, cordoning off the CBD's main arteries and diverting traffic.
Inside the cordon, half a dozen city blocks usually crowded with people were deserted and quiet. Outside it, life continued, with people shopping, strolling and sitting in cafes as police helicopters buzzed overhead.
The siege took place close to many key buildings, including the State Library, Sydney Hospital, the NSW Supreme Court, the US consulate and state parliamentary offices. They were all evacuated, along with many banks and businesses.
As police teams took up positions outside the Lindt, officers equipped with small ladders helped office workers to climb out of a first-floor window above the cafe. The Sydney Opera House was also evacuated temporarily following the discovery of a suspicious package.
Patrick Byrne, a Channel 7 producer, said staff watched events unfold. "We raced to the window and saw the shocking and chilling sight of people putting their hands up against the panes of glass," he said.
NSW Police are seen in the central business district of Sydney. Photo / AAP
Although the public was warned to stay away from the area, several hundred people gathered outside the police cordon to watch the drama.
"I can't believe this is all going on just down the street," said a woman. "I feel for all those people inside. They must be absolutely terrified."
A Lindt cafe worker who managed to get out of the building told Nine News: "Everyone was sitting down, the door was locked. There was one guy walking around with a hat and a beard."
Grainy images of what appears to be the gunman wearing a black bandanna with white Arabic script have emerged. First Look Media's Andy Carvin asked people on Twitter to help translate the writing, and said the consensus was: "We sacrifice ourselves for you, O Mohammed."
NSW Public Order and Riot Squad Police are seen outside the Lindt cafe in the central business district of Sydney. Photo / AAP
Meanwhile, an anxious mother urged the public to pray for her daughter, believed to be one of the hostages. A family friend told the Daily Mail Australia: "At this stage she [the mother] is calm and just hoping for her release."
As the standoff continued, fears for the hostages grew. Then at 3.45pm, three people ran from the cafe.
Two came out of the front door and one from a fire door. All had their arms raised in the air.
Dramatic television images showed the terrified hostages being shielded by heavily armed police.
One was a man in a white shirt and blue jacket, another wore a white shirt, while the third was clearly a Lindt cafe worker dressed in black.
She said police had spoken with the gunman for the first time. Her information was that the remaining hostages hadn't been harmed.
The incident had not been branded a terrorist attack yet, but police had "moved to a footing consistent with a terrorism event".
Prime Minister Tony Abbott told a press conference the national security committee of Cabinet had been convened and briefed. The government did not know whether the hostage situation was politically motivated "although there are indications it could be".
Police negotiations with the hostage-taker were continuing late last night.
"The whole point of politically motivated violence is to scare people ... Australia is a peaceful, open and generous society and nothing should ever change that and that's why I urge all Australians to today go about their business as usual."
Later it emerged the gunman had requested an Islamic State flag and a conversation with the Prime Minister.