Three people were stabbed in the incident and police confirmed one of the victims died at the scene, while another two were rushed to hospital.
Victoria Police said officers responded to reports of a auto fire before they were confronted by the man.
A total of three people were stabbed during the assault, police revealed during a press conference.
Superintendent Clayton said there is no known link to terrorism at this stage and they are not looking for anyone else in relation to the incident.
Mr Clayton said Victoria Police's gun response unit had cordoned off the area and the bomb response unit was making the scene safe while Melbourne Fire Brigade had tackled the vehicle fire.
A second person suffered a head injury and has been taken to hospital.
Police shoot a man lunging at them with a knife on Melbourne's Bourke Street.
The attacker reportedly torched his auto before the vehicle burst into flames.
The area has been cordoned off and the public are urged to avoid the area, ' they said earlier.
The exact circumstances are yet to be determined at this stage.
It's understood a third person has also been taken to hospital.
There were large spots of what appears to be blood near the figure, as were a pair of men's black lace-up shoes.
Photo from the scene showed crowds of people behind police barriers.
"He seemed to be waving something, people around me screamed that he had a knife, but I couldn't see clearly from where I was", a witness told ABC News.
Her immediate thought was, "Oh no, not another Bourke Street incident", she said. The attacker was detained after police shot him in the chest. Police response was swift and overwhelming.
The incident comes as a trial continues into the horrifying rampage in Bourke St in January a year ago.
Walmart Black Friday 2018 Ad is Released
White House revokes CNN reporter's press pass after clash with Trump
Movies with heroes who play roulette
Jets vs Steelers, odds and predictions
Mobile gambling market set to be worth 100 Billion by 2017
Donald Trump braces for investigations galore as Dems take House
The main attractions of casino
Trump administration moves to restrict asylum claims by migrants
The main reasons why your bet can loose
Chrome 71 will block all ads for abusive websites automatically
Thousands flee fast-moving wildfire in Northern California
Square Enix cancels future Final Fantasy XV DLC, game director resigns
Mangled wreckage of BHP runaway train revealed in video footage
12 tweets that are more savage than the Thugs of Hindostan
Ecclestone wants Formula 1 to Adopt Premier League Revenue Distribution Model
Assassin's Creed Odyssey's November update will add monsters, quests, and more
California bar shooting: Ian David Long identified as suspect