Officers were confronted near the burning vehicle by a man "brandishing a knife and threatening them" while passersby called out that people had been stabbed, Victoria state police Supt.
Witness footage showed police struggling for at least a minute to corral a large man wearing a dark tunic as he lunged, slashed and stabbed wildly at two officers.
Police said three members of the public were stabbed, one of whom died from their injuries at the scene.
Police said there was no terrorism link at this stage but they are "keeping an open mind".
'I heard a massive explosion, the vehicle is completely alight, ' she said.
A man tries to help police, pushing a trolley at the attacker.
Commissioner Ashton said the man was known to police and the federal intelligence agencies.
Three people were reportedly been taken to hospital after the incident on Bourke St.
"We thank our police, those who came to assist them", he said.More news: A ‘Breaking Bad’ Movie Is Coming & Might Be Called ‘Greenbrier’
The two survivors were taken to hospital - one in a suspected critical condition. The attacker was detained after police shot him in the chest.
A courageous bystander dubbed "Trolley Man" has been praised for his selfless actions in his attempt to halt a knife-wielding man who'd stabbed three people in Melbourne's Bourke Street.
"The exact circumstances are yet to be determined".
Speaking at the scene, Superintendent David Clayton said: "Police quickly responded to the incident".
More than 100 police swarmed on the area.
The two other victims were in hospital, with local newspaper The Age reporting that one has a head injury and the other a neck injury.
Australian police say the pickup truck contained several barbeque gas cylinders. The video also shows another individual, dubbed "trolley man", quickly barging in with a trolley directly hitting the attacker and stalling him to buy the police some time.
I condemn the act of terrorism in Melbourne today that has tragically taken the life of a fellow Australian who has died as a result of this evil and cowardly attack.