Police believe the deadly attack by a Somali-born Australian was an act of terrorism, possibly designed to destroy a vehicle filled with gas cylinders in the city centre.
The man, who died after being shot by police, set a four-wheel drive car on fire before stabbing three men, including one who died in hospital.
Isil claimed the attack, its propaganda channel said.
“The perpetrator of the operation… in Melbourne… was an Islamic State fighter and carried out the operation… to target nationals of the coalition” fighting Isil, Amaq reported a jihadist security source as saying.
Graham Ashton, chief of Victoria State police, said the man was known to counterterrorism agencies through his “family associations”. “His family members are certainly known to us from a terrorism perspective,” he said.
Mr Ashton said the man moved from Somalia in the 1990s to Melbourne’s north-west suburbs. He had convictions for cannabis use, theft and driving offences but not for violent offences.
Some witnesses claimed he was yelling “Allahu akbar”, though police said this was not confirmed. They added they did not believe there was an ongoing threat.
According to ‘The Herald Sun’, the man had his passport cancelled several years ago.
Victoria’s premier, Daniel Andrews, condemned the “act of evil” and pledged the city would “go about our business this weekend and every weekend”.
“This is an evil, terrifying thing that’s happened in our city and state,” he said. “We condemn it… We’ll not be defined by this act of evil.”
Police said the car was parked before being set alight.
“There were gas bottles – I understand at this stage they are barbecue-style gas bottles – within the vehicle,” Commissioner Ashton said.
Footage taken by witnesses showed police shooting the man after he threatened them with an object that appeared to be a knife. Witnesses said the car exploded before the man began stabbing people.
“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. “And then I heard one loud bang. It sounded like a gunshot.”
Sarah Werkmeister, a witness, told ‘The Herald Sun’: “All I saw was the car on fire, and the police cuffing someone on the ground. People who’d seen it told me they heard shots being fired, and everyone heard an explosion that was like the petrol exploding.” (© Daily Telegraph, London)