Prime Minister Tony Abbott, who has warned of militant plans to strike Australian targets, said there were indications the hostage situation at the Lindt Cafe was politically motivated.
“This is a very disturbing incident. I can understand the concerns and anxieties of the Australian people,” Abbott told reporters in Canberra, without providing any information on the unfolding siege.
Australia, a staunch ally of the United States and its escalating action against the Islamic State in Syria and Iraq, is on high alert for attacks by home-grown militants returning from fighting in the Middle East.
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Police had not had any direct contact with the hostage taker, said Andrew Scipione, police commissioner for the state of New South Wales.
“We have moved to a footing that would be consistent with a terrorist event,” Scipione told reporters in Sydney.
A Lindt Australia executive said there were about 10 staff working at the cafe, Sky Business television reported. Chief Executive Steve Loane also said there were “probably 30 customers” in the cafe, according to Sky Business, although he stressed to another news outlet that he was guessing.
The hostage drama forced the evacuation of nearby buildings in Sydney’s central business district and sent shockwaves around a country where many people have started to turn their attention to the approaching Christmas festive season.
In September, Australian anti-terrorism police said they had thwarted an imminent threat to behead a random member of the public and days later, a teenager in Melbourne was shot dead after attacking two anti-terrorism officers with a knife.
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Dozens of heavily armed police surrounded the cafe in Martin Place around mid-morning. The area is home to the Reserve Bank of Australia, commercial banks and close to the New South Wales state parliament.
The cafe was directly opposite a commercial television studio and footage showed several people inside the cafe standing with their hands pressed against the windows.
Pictures showed a black and white flag similar to those used by Islamic State militants in Iraq and Syria being held up by what appeared to be a staff member and another woman.