A man armed with a shotgun is holding hostages at a cafe in the heart of Sydney’s CBD.

A flag in the window of the Lindt cafe, earlier reported to be the militant Islamist ISIS banner, is now thought to be a shahada flag, or the black flag of Islam.

The faces of at least three customers and workers could be seen pressed against the cafe window with their eyes closed, holding up the flag.

The ABC reported: “Witnesses have reported hearing loud bangs that sounded like gun shots.”

The area has been shut down, the nearby Westpac Bank and a Channel Seven office evacuated.

Seven News said: “It’s believed at least 13 hostages are being held in the cafe.”

In other buildings, police have been advising people to stay inside and stay away from windows.

Patrick Byrne, a Channel Seven producer, told the ABC that Police came and ordered everyone off the floor.

“We raced to the window and saw the shocking and chilling sight of people putting their hands up against the panes of glass at the cafe,” he said.

Chris Kenny, A Sky News journalist, had just left the cafe with a takeaway coffee when a woman tried to get in inside.

The door was locked and she saw a man with gun inside.

She rang police and three motorcycle police were on scene immediately.

Heavily armed special operations police were assembled at the front of the Lindt cafe as well as at the rear. Police continued to push back the cordon around the area.

The blocks surrounding the location of the siege are the heart of business and finance in Australia, with the Reserve Bank of Australia head office a short walk away and nearby offices including the national headquarters of the Commonwealth Bank and Deutsche Bank.

Channel 7 is reported to be having “difficulty” getting through to their reporters on the ground. The television station is speculating that police may have jammed mobile network.

The Australian Federal Police were set to hold a media conference this morning on its disruption of terrorism operations in Western Sydney, but that press conference has since been cancelled in the wake of this unfolding event.

Elizabeth Street is closed and one north bound lane of Macquarie Street is closed and Police are beginning to expand the exclusion zone

Trains between the city and Bondi Junction have been stopped.

Deputy Prime Minister Warren Truss released a statement saying reports that airspace over Sydney has been shut are incorrect.

“The airspace over the Sydney CBD is not shut down,” he said. “There are choppers in the air and air traffic is being rerouted. At this stage no impact on the air traffic network.”

Prime Minister Tony Abbott says he’s spoken with Premier Mike Baird and offered him all possible Commonwealth support and assistance.

The National Security Committee of Cabinet has also convened for briefings on the situation.

“This is obviously a deeply concerning incident but all Australians should be reassured that our law enforcement and security agencies are well trained and equipped and are responding in a thorough and professional manner,” Mr Abbott says.

Firefighters are standing by wearing breathing equipment.

Meanwhile the Sydney Opera House has been evacuated after a package was found. It was not known whether there is a connection to the cafe incident.