Melbourne stabbing attacker identified as Hassan Khalif Shire Ali from Somalia

Victoria Police Saturday identified the man, who set a car on fire and stabbed three people, killing one of them, before being fatally shot in the Australian city of Melbourne, as Hassan Khalif Shire Ali from Somalia.

The police said it has executed search warrants in two properties and spoke to Ali's wife as part of the investigation.

Ali, who was driving a ute, loaded with gas bottles, into the Bourke Street, allegedly set it alight and began stabbing members of the public Friday.

He was shot by police as he lunged towards them with a knife. He later died in a hospital.

Victoria Police Chief Commissioner Graham Ashton confirmed Ali died in the hospital after being shot by police.

One man, who is yet to be formally identified, died at the scene after the stabbing. A 26-year-old man was in a stable condition in the Royal Melbourne Hospital, while a 58-year-old also remains in hospital with non-life threatening injuries.

Police were treating the attack as terror-related at this stage, and counter-terrorism investigations were continuing into Ali's background.

Ashton said he believed the suspect moved to Australia from Somalia in 1990s, and that his family members have been known to police on terrorism-related matters.

On Saturday, the Joint Counter Terrorism Team began executing search warrants on two homes in Werribee and Meadow Heights.

Ashton said police had spoken to Shire Ali's wife.

He further said Ali was was the brother of a man arrested in relation to committing acts in preparation for a terrorist attack.

"He is known to both Victoria Police and federal intelligence authorities," Ashton said, adding that ''there is no ongoing threat that we know of ... as I speak to you.''

"But certainly we are treating it as a terrorism incident. He's got family associations that are well known to us," he said.

According to media reports, the IS had claimed responsibility for the attack via the Amaq news agency, which 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.

In a statement, Australian Prime Minister Scott Morrison said he condemned the act of terrorism in Melbourne, describing it as an "evil and cowardly attack".

He said he had been briefed by law enforcement and security agencies and acknowledged the investigation by the Joint Counter Terrorism Team, led by the Victoria Police.

"Australians will never be intimidated by these appalling attacks and we will continue to go about our lives and enjoy the freedoms that the terrorists detest," he said.

State Premier Daniel Andrews and the opposition leader Matthew Guy  also condemned the attack.