SYDNEY, Dec. 15 -- New South Wales (NSW) Police said on Monday that they were still uncertain why a gunman was holding dozens of people inside a cafe in the center of Sydney's business district.

At a joint press conference with NSW Premier Mike Baird, Police Commissioner Andrew Scipione confirmed there was one armed man holding "an undisclosed number of hostages" but he said police were yet to establish direct contact with the gunman.

"My advice is we haven't had contact with the armed offender," he said. "We're still not in a position to determine where the individual is from."

Scipione said the hostage situation was "on a footing consistent with a terrorist act."

Baird said the people of Sydney were being tested but he had full confidence in the police, who had acted decisively.

"We are being tested today in Sydney. The police are being tested; the public is being tested, but whatever the test, we will face it head on. We will remain a strong, democratic, civil society," he said.

Earlier in the day, police from the counterterrorism taskforce arrested a man in Beecroft in Sydney's northwest but Scipione said there was no connection with the cafe siege.

He said hundreds of police had been involved, including police specially trained for terrorist threats, tactical officers and negotiators to general duties officers and traffic police handling road closures.

Scipione urged people to stay calm with reports swirling around the city of other areas being evacuated or locked down, saying the action was concentrated in a small area in the Martin Place area.

"People see a police vehicle drive down their street and think they're suburb or shire may be involved. That's not the case," he said.