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.
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