There are a number of hostages, believed to be anywhere between 13 and 50 people, being held inside the cafe in Martin Place by man with possible links to terrorist organisations.
The bearded man, wearing a black bandana around his head, has been filmed inside the cafe where the hostages have been forced to stand against the windows and hold a black Islamic flag.
© Nine News/Channel Seven An image of the suspected hostage taker.
Hadley said the hostage called the radio station saying the gunman at the centre of the siege wanted him to be put on air.
"I told the young man it's not in your best interest to be heard on the radio live. It's not in anyone's interest and it's certainly not in the hostages' interest," Hadley said.
"There are trained negotiators who have vast experience in dealing with these matters and they're the ones who should be dealing with this not radio presenters."
When he refused, the hostage asked Hadley to ring him back in ten minutes where the hostage taker would issue further information.
The 2GB presenter said he had been talking to police off the air and receiving advice about the conversation.
He said a "password" was mentioned but it was not clear what this was in relation to.
What we know so far about the Martin Place hostage situation
• There are differing reports that as many as 50 hostages are being held in Lindt cafe in Martin Place
• Hostages forced to hold up black flag with Arabic script in the windows (it is not the official ISIL banner)
• Police are yet to make contact with the armed offender
• One gunman armed with shotgun, handgun or both
• Unconfirmed radio reports have claimed the perpetrator has demanded to speak to Prime Minister Tony Abbott and claimed to have planted four explosive devices across Sydney
• The federal government's National Security Committee has convened for briefings on the situation
• Thousands of people have been evacuated from buildings in the surrounding area
• Reports that raids are being carried out in Lakemba are incorrect
• Prime Minister Tony Abbott has called on all Australians to stay calm
• Workers at nearby businesses have been advised to go home for the day
• Reports Jewish schools and institutions across the country in lockdown
• All Sydney CBD courts are closed for the day
• The siege is being treated as a criminal situation
• The arrest of a man near the scene is not believed to be related
The alarm was raised about 9.45am after onlookers reported a man with a shotgun taking hostages in the cafe.
Hostages inside the cafe have been forced to hold what appears to be an Islamic flag, identified as a Shahada flag, in the cafe's window reading "no god worthy of worship except Allah and Muhammad is his messenger".
The flag is used by the group Jabhat al-Nusra - which preaches jihad and has links to terror groups ISIS and Al Qaeda.
Queensland's police commissioner says he has information an improvised explosive device is involved in the hostage drama in central Sydney.
Ian Stewart has told the Queensland government that information was "firming up" that an IED is involved.
There are more than three tactical police units on the scene, around 50 uniformed officers and scores more detectives in plain clothes and bulletproof vests.
Hundreds have been evacuated in the Martin Place area while others in the CBD have been told to stay inside their buildings.
Prime Minister Tony Abbott has called on Australians to stay calm and trust the police to do their job as the tense hostage situation continues.
Mr Abbott said Australians had to understand there were people in the world who wished to harm the country, but he stopped short of calling the incident terrorism-related.
"We don't know whether this is politically motivated, but there are some signs it could be," he said.
He also said there was no cause for panic.
"I would urge all Australians today to go about business as usual," he said.
Further illustrating the government's caution was Mr Abbott’s revelation that NSW Police were still in command of the operation, showing it was still being regarded as a criminal matter rather than a terrorist one.
He said the "ordinary business of government" would continue with Treasurer Joe Hockey to release the budget update shortly.
However, he acknowledged the terror the hostages must be feeling in their situation.
"This is a very disturbing incident," he said.
"Our hearts go out to those people."
Journalist Chris Kenny, who was in the cafe about 20 minutes before the siege began, said he understood the automatic glass sliding doors had been disabled.
"I did speak to a couple of people who saw a bit more of this unfold than I did," he said.
"One woman said she tried to go into the shop just after I came out with my takeaway coffee but the doors wouldn't open.
"So obviously whoever is doing this has disabled the automatic glass sliding doors to stop anyone else going in.
"She said immediately she could see there was a weapon.
"She mentioned (the weapon) being taken out of a blue bag and people were straight away asked to put up their hands."
Businesses that share the same building at the centre of the siege in Martin Place told ninemsn they are yet to be evacuated as they await police instruction.
It is understood that staff of a number of businesses in 53 Martin Place are remaining in their offices and have been in contact with police through their building management.
A barrister who worked in the floors above the cafe told 9NEWS when he heard the sirens he "thought nothing of it".
"I heard some witnesses say they went to go in (to the café) and saw a man with a sawn-off shotgun,” he said.
He said the building has some fire exits where people could use to leave the building but he thought police could have sealed them off.
"I obviously can’t remember anything this dramatic ever happening in Sydney,” he said.
He walked downstairs just as the situation was unfolding, and was quickly ushered outside by police.
He estimated at least 50 other barristers were stuck on the floors above the café.
The Sydney Opera House was evacuated earlier.
Hadley says there are unconfirmed reports that police are responding to as many as four incidents relating to suspicious packages across the city.
Workers in nearby buildings, including the Seven Network, have been ordered to evacuate the area.
Police have moved all media and bystanders back about 70 meters from the Lindt Cafe.
Heavily armed tactical response police are taking turns behind a blast shield on the corner of the building. The officers are moved into the critical position for a short period of time before being swapped with reserve police behind cover.
Nearby streets are swarming with onlookers and media.
Tactical units and dozens of plain clothes police have gathered by the emergency exit of Channel 7 directly across from the cafe.
Motorists are advised to avoid the Sydney CBD.
The siege came after a Sydney man was taken into custody on suspicion of terrorism related offences after a raid from AFP and NSW police counter terrorism units this morning.
The AFP said a 25-year-old Beecroft man was arrested as part of investigations into the planning of a terrorist attack on Australian soil and the facilitation of travel of Australian citizens to Syria to engage in armed combat.