A KNIFE-wielding man has stabbed three people, one fatally, in Melbourne in an attack police linked to terrorism.

The attack brought the centre of Australia’s second largest city to a standstill. Hundreds of people watched from behind barricades as police tried to apprehend the attacker.

Officers said the man got out of a pick-up truck, which then caught fire, and attacked three bystanders with a knife.

He also attempted to attack police who arrived on the scene, before being shot in the chest by an officer. He died in hospital.

One of the victims also died, while the two others were admitted to hospital.

Police said the attacker’s vehicle contained several barbecue gas cylinders in the back. A bomb squad rendered them safe.

Victoria Police Commissioner Graham Ashton said the suspect, originally from Somalia, was known to police and the incident was being treated as terrorism.

Daesh claimed the attack in a statement released through its Aamaq media arm.

It said the man was “one of Islamic State fighters” and had responded to IS calls for attacks in countries that are part of the international coalition fighting the militants in Syria and Iraq.