Police said the man got out of a vehicle, which then caught fire, and attacked three bystanders with a knife before being shot by police.
While it was known he held radicalised views, federal police didn't believe he posed a serious threat, and revealed he was not being actively monitored at the time of the attack.
"I'm not at liberty at this point to disclose the identity of that person". Clayton said there is no known link to terrorism, but stressed the investigation is still in its early stages.
They were hopeful his "situation would improve" after he married, but the imam said in recent weeks Shire Ali had given them fresh cause for alarm.
We're live with Superintendent David Clayton following an incident on Bourke Street in the CBD this afternoon.
Paramedics said they assessed three people at the scene, one with a neck injury: "They are in a suspected critical condition".
Police initially responded to a report of a auto on fire near the corner of Swanston Street about 4:20 pm (local time), Victoria Police said in a statement.
The officers were immediately confronted by a man brandishing a knife and threatening them.
One neighbour said Shire Ali had moved in about a year ago with his wife and young son. A male person was in that vehicle.
Niño se quiere ir con Dios por sufrir bullying
El video lo compartió la hermana del nene en Facebook el martes por la noche, pero luego lo borró. Le he dicho a mi mamá que tengo ganas de reunirme con Dios y morirme.
He did say though it looked like there had been some attempt to light a fire as the canisters had been "turned to open".
Director of National Security Policy at the ANU National Security College Jacinta Carroll told SBS News: "IS of course has a methodology where they will claim any attack that in a very broad sense appears to be in line with what their group does. whether they directed it or not".
Video footage showed the attacker lunging at police with a knife as they tried to contain him. His brother Ali Khalif Shire Ali is now on remand awaiting trial next year for allegedly planning an attack, Ashton said.
In a series of tweets, Daniel Andrews, the premier of Victoria state, called the incident "an act of terror struck the heart of our city, in a place where past wounds have still not healed".
"Me and the managers ran out and that's when we saw the auto on fire and then we saw the guy on the floor and we wanted to help, there were two blokes helping him out already, he was face down pools of blood around his face", Villasin said.
"I'm pretty sure he got stabbed in the face". I really wanted to help but I was in shock, I didn't know what to do.
No police officers were injured in the attack and police have confirmed that they are not pursuing any other individuals in relation to the incident.
At the time of publishing, Swanston Street trams are delayed in both directions, and route 86 and 96 trams are diverting along La Trobe Street between Melbourne Museum and Spencer Street, according to Yarra Trams.
Police cordon off Bourke St after a vehicle explosion.
Witness Drew Hair told AAP that the suspect was dressed in a black tunic and white trousers and was about six foot four inches tall and of African appearance.