ISIS claims responsibility for Melbourne siege that left two dead

A fatal shootout claimed by the Islamic State group was being treated as a terrorist attack by Australian police Tuesday, as the prime minister condemned it as "shocking and cowardly".

Australian police are treating Monday's hostage taking incident in Melbourne as an "act of terrorism".

A 29-year-old killer responsible for instigating a police siege in the affluent Melbourne suburb of Brighton had a history of run-ins with the law from his teen years onwards.

Australian Prime Minister Malcolm Turnbull said he would be asking for answers from state authorities on how Khayre was allowed to be out on parole.

As Prime Minister Malcolm Turnbull put it, there are "very, very grave questions" to be answered over why this unsafe man was able to carry out this attack, which police are treating as an act of terrorism, in the name of Islamic State and al-Qaeda.

Both Turnbull and Ashton confirmed Khayre was known to police and had been released on parole at the time of the attack.

The state's chief police commissioner, Graham Ashton, said it was still not certain as to whether it was a planned attack.

Local media reports said that police carried paper bags of evidence containing a book with Arabic writing from Buckingham Serviced Apartments on Bay Street, where Khayre held a sex worker hostage before he was killed by police.

According to the wire agency, "court documents show Khayre migrated as a child with his family to Australia through a Kenyan refugee camp".

Australian investigators immediately raised concerns about the possibility that the violence had been inspired by recent acts of terrorism committed in the United Kingdom, including, most recently, a deadly attack on London Bridge.

"We don't know much in Australia, and we don't speak English and we are truly helpless here", she said.

Australia's terror threat level is now at "probably" - the third-highest level on the government's scale.

Australia has not increased its terror threat level and police said they were not looking for any other suspects.

Somali-born Khayre was on a terror watch list and in a deradicalisation program when he shot Mr Hao dead in a Brighton apartment building and barricaded himself inside a room on Monday afternoon.

"We've got three officers wounded at the scene in the gunfight with this individual, fortunately they look like they're OK", he said.

During the attack, Victoria state police went to the building where Khayre took a woman hostage and tried to negotiate with him after the woman called emergency services saying she was being held hostage.

Al Qaeda and ISIS also have no direct affiliation, and are effectively in opposition to one another, making the alleged claim by Khayre confusing.

Khayre first came to the attention of Australian counterterrorism police in 2009, when he was one of five men accused of plotting an attack on Sydney's Holsworthy Army base to kill soldiers.

Police believe he became radicalised after attending Preston mosque with other men who were also charged over the barracks plot.

One police officer was shot in the neck and ear and two officers suffered wounds to their hands, but none of the wounds was life-threatening, Ashton said.

During his time in prison, Khayre set fire to Loddon Prison in Castlemaine and Barwon Prison in Anakie in February 2014 and February 2015 respectively.

Australia passed laws past year allowing the indefinite detention of anyone convicted of terror-related offences if authorities believed that person posed a threat after their release.

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