Photo / Channel 7 / Twitter
Photo / Channel 7 / Twitter
Up to 20 hostages are being held in an armed siege in a cafe in Sydney where an extremist flag was being held up in a window.
Witnesses reported seeing staff and customers sobbing as they were forced to stand with their hands pressed against the windows of the Lindt cafe.
There are unconfirmed reports that one of the hostage-takers has made contact with police saying that he has 'devices all over the city' and 'wants to speak with the prime minister live on radio', according to Ray Hadley, from 2GB.
Up to two gunmen are believed to be involved in the siege but dozens of armed police have sealed off the streets surrounding the site.
One gunman is believed to have a shotgun and possibly an explosive device.
Watch a live stream from the scene here:
The incident began just hours after a 25-year-old suspect was arrested in a terror raid in Sydney.
Officials have also evacuated the Opera House after reports of a suspicious device.
A reporter for the newspaper at the scene said a man who appeared to be a priest was escorted into the cafe.
9 News reported one witness said: "Everyone was sitting down, the door was locked. There was one guy walking around with a hat and a beard."
Martin Place has been shut down and scores of police are surrounding the building after the alarm was raised about 9.45am (11.45am NZT).
An Islamic flag - black with white writing on it - has been held up to the glass.
The Seven Network newsroom, which is in a building opposite the cafe, has also been evacuated.

Journalist Chris Kenny, who was in the shop about 20 minutes before the siege began, said he understood the automatic glass sliding doors had been disabled.
"I did speak to a couple of people who saw a bit more of this unfold than I did," he said.
"One woman said she tried to go into the shop just after I came out with my takeaway coffee but the doors wouldn't open.
"So obviously whoever is doing this has disabled the automatic glass sliding doors to stop anyone else going in and she said immediately she could see there was a weapon.
"She mentioned it being taken out of a blue bag and people were straight away asked to put up their hands."

Australian Prime Minister Tony Abbott released a statement saying the siege was "deeply concerning" and the National Security Committee had convened for briefings.
"New South Wales Police and the Australian Federal Police are currently responding to a reported hostage-taking incident in Martin Place in Sydney."
Mr Abbott said he had spoken with NSW Premier Mike Baird and offered him "all possible" Commonwealth support and assistance.
The National Security Committee of Cabinet had also convened for briefings on the situation.
"This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner."
Mia Burns, a news producer for Seven, tweeted: 'Hostages against the glass of Lindt café. Some are shaking and sobbing.'
Seven Network staff are sheltering inside the media company's Martin Place headquarters.
The Morning Show co-host Kylie Gillies said police had locked down the Seven building at 52 Martin Place in Sydney's CBD, right across from the Lindt Chocolat Cafe.

NSW Public Order and Riot Squad Police are seen outside the Lindt cafe in the central business district of Sydney. Photo / AAP
She was sheltering with about 40 other Seven staff members.
"It's quite tense," Ms Gillies said.
"Our first thoughts, of course, are with the customers and staff at Lindt, and their families.
"We can see them and we can see the fear in their eyes."
She said Martin Place was now cordoned off and "eerily empty" of pedestrians.
"There's a heavy police presence," she said.
"We're all praying for a peaceful outcome."

Evacuees in Hyde Park, Sydney. Photo / AAP
Ms Gillies told AAP she saw the situation unfold "live on air" from about 9.45am.
"Marlisa (Punzalan) from XFactor was on live on our show and Larry (Emdur) and I turned around and looked out the window and there were all these cops running around," she said.
"Larry and I broadcast for the next 40 minutes as the events unfolded.
"It was so scary to see the hostages standing at the window with their arms up to the glass."
The lockdown means Seven's coverage of the siege is being telecast via Melbourne.
A Seven representative says one of its news reporters, who is an expert in terrorism, has identified the flag being held up in the window.
"One of the reporters believed it was an al-Qaeda flag," he said.
Seven Network producer Patrick Byrne said staff watched the drama out their windows.
"Our editorial meeting was interrupted this morning when we heard reports that police were in Martin Place carrying shotguns," he said in an interview carried on the ABC.
"We all raced to the window and there we saw the shocking and chilling sight of people putting their hands up agains the panes of glass at the cafe."
Other buildings in Martin Place, including the nearby Westpac building, have been cleared.
Workers in government buildings in Martin Place have been told to stay away from windows, The Daily Telegraph reported, while all traffic in and out of the area has been stopped.
Police have cordoned off the area to about 150m and a special police operations unit is outside the building.
"We're just recommending no one go near Martin Place at the moment," a NSW Police spokeswoman said.
Martin Place train station has been closed and public buses are being turned away.
Martin Place has several prominent buildings, including Premier Mike Baird's office, the Reserve Bank of Australia, Westpac Bank and the Commonwealth Bank headquarters as well as the US embassy and Network Seven.
The Supreme Court, Sydney Hospital and NSW parliament are also nearby.
Mobile phone signals in the area around Martin Place had been jammed, a Guardian Australia reporter said.
A spokesman for deputy Prime Minister Warren Truss said the airspace over Sydney's CBD had not been shut down.
"There are choppers in the air and air traffic is being re-routed accordingly. At this stage no impact on the air traffic network."

NSW Public Order and Riot Squad Police are seen outside the Lindt cafe in the central business district of Sydney. Photo / AAP
The news channel is also reporting that 13 people are being held hostage inside the central city cafe.
9 News journalist Tom Steinfort posted: "Latest reports are that 13 hostages being held in the centre of Sydney, by two armed Islamic terrorists."

Sky reports that the flag says: "There is no God other than Allah".
Twitter user Mo Elleissy said the writing on the flag translated as "no god worthy of worship except Allah and Muhammad is his messenger".
In another tweet he suggested that because the cafe "has no symbolism and the flag is a prop, could be someone appropriating ISIS for attention grabbing".

NSW Public Order and Riot Squad Police are seen outside the Lindt cafe in the central business district of Sydney. Photo / AAP

- Daily Mail / AAP / NZME. News Service