Armed police have responded to an apparent hostage situation at the Lindt cafe in Martin Place.
People in the cafe have been seen with their hands pressed up against the windows and evacuations have been carried out in nearby buildings.
Prime Minister Tony Abbott said police and security forces were yet to determine the motivation of the incident.
“We don’t know if this is politically motivated,” he said.
"Obviously there are some indications that it could be.
"We have to appreciate that even in a society such as ours, there are people who would wish to do us harm, that's why we have police and security organisations of the utmost professionalism that are ready and able to respond to a whole range of situations and contingencies including this situation that we are now seeing in Sydney.
"The whole point of politically motivated violence is to scare people out of being themselves. Australia is a peaceful, open, and generous society. Nothing should ever change that and that's why I would urge all Australians today to go about their business as usual. "
Stating that the normal business of government had to continue, Mr Abbott said that Treasurer Joe Hockey would issue the Mid-Year Economic Fiscal Outlook on Monday.
He also confirmed that the National Security Committee of Cabinet has met.
"This is a very disturbing incident," he said.
"I can understand the concerns and anxieties of the Australian people at a time like this, but our thoughts and prayers must above all go out to the individuals who are caught up in this.
"I can think of almost nothing more distressing, more terrifying than to be caught up in such a situation and our hearts go out to these people."
Opposition Leader Bill Shorten has also issued a statement on the siege, stating that "our thoughts and prayers today are with the innocent people involved".
"Our thoughts are also with their families who are seeing this incredibly distressing situation unfold, along with the rest of Australia," he said.
Acting Greens Leader Adam Bandt stated "we share the distress of everyone else around Australia as we watch this terrifying situation unfold".
"This is a time for everyone in the community to come together as we hope for a peaceful outcome," he said.
NSW Premier MIke Baird also issued a statement on the ongoing situation in Martin Place.
"All my thoughts and prayers are with those members of the public affected by the situation in Martin Place and the NSW Police who are trained to deal with these events," he said.
"I have spoken to Police Commissioner Andrew Scipione and have full confidence the NSW Police are working effectively to resolve the situation.”
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