It was not immediately clear whether the violence was related to a recent call from the Islamic State group to supporters to kill in their home countries. But police said the man appeared to be acting alone.
An Australian Federal Police officer and a Victoria state police officer, who were part of a Joint Counter Terrorism Team, had asked the 18-year-old man to come to a police station in southeast Melbourne in relation to a routine matter in an investigation when the violence erupted, Victoria state police Assistant Commissioner Luke Cornelius said.
"Our members had no inkling that this individual posed a threat to them and as far as we were concerned, it was going to be an amicable discussion about that individual's behavior," Cornelius told reporters.
Both police officers were taken to a hospital and were in stable condition today.
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"It appears this individual was acting on his own and was not acting in concert with other individuals," Cornelius said. "It's our belief at this stage that this is an isolated incident."
Onlookers said the dead man had been shouting insults about Prime Minister Tony Abbott and the Australian government in general in the moments before he was shot, The Age newspaper reported.
Abbott warned today that Australians who fight with the Islamic State group in the Middle East will be "jailed for a very long time" when they return home under a proposed law that would make it an offense to simply visit terrorism hot spots abroad.
Abbott's government is to introduce the proposed law to Parliament tomorrow. The legislation is designed to make it easier to prosecute Australian jihadists when they return home from Mideast battlefields and carries sentences of up to life in prison.
At least 60 Australians were fighting in Iraq and Syria with the Islamic State group and another al-Qaida offshoot, Jabhat al-Nursa, also known as the Nusra Front, the prime minister said.