One of Sydney's main business areas has been closed off following reports that up to 40 people are being held hostage in a Lindt cafe.

It was originally though that 12 people were being held hostage, however the CEO of the Lindt company has now reported that up to 40 or even 50 people may be held captive in the cafe, including 10 staff and 30 customers.

It has been reported that one or two gunmen entered the Lindt cafe at 9.40 am and are holding the victims captive.

Live television footage showed customers, and staff wearing aprons, in the café, standing with their hands pressed up against the windows. They appear to be holding up a black flag with Arabic writing on it.

The black and white flag, similar to those used by Islamic State militants in Iraq and Syria was visible in the window of the shop, contributing to fears of an Islamist terrorist attack, though this has not been confirmed. A translation of the script of the flag has been identified as reading: "There is no God but Allah and Muhhammad is the messenger of Allah.'

Noone is as yet able to confirm whether this attack is linked to sympathisers of Islamic State.

Unconfirmed reports are emerging on Twitter that the hostage takers have contacted a Sydney radio station demanding to talk to the Australian prime minister live on air. An image of one of the suspects is also circulating on social media.

Eye witnesses report a large police presence at the scene, with over 100 officers deployed, including those in armoured vehicles. Police officers were seen with guns drawn outside the cafe.

New South Wales Police tweeted: "A police operation is under way in Martin Place, Sydney's CBD. People are advised to avoid the area."

Channel 7 has offices 30 or 40 metres from the chocolate shop and have cameras trained on the building as the siege continues.

A finanical centre of the city, the Reserve Bank of Australia, commercial banks and close to the New South Wales state parliament, also occupy parts of the same building in St Martin's Place.

Trains around the area have reportedly been stopped between Bondi Junction and Central, and roads are blocked. It was initially reported that airspace over Sydney has been shut down, however the deputy prime minister's office has now refuted the reports explaining that there are police helicopters in the air so air traffic is being rerouted accordingly.

Australian Prime Minister, Tony Abbott, has issued a statement about the siege as The National Security Committee of Cabinet convenes for briefings.

The statement reads: "New South Wales Police and the Australian Federal Police are currently responding to a reported hostage-taking incident in Martin Place in Sydney. I have spoken with NSW 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. We will provide regular updates as further information becomes available."

New South Wales premier, Mike Baird, has also issued a statement saying: "All my thoughts and prayers are with those members of the public affected by the situation in Martin Place and the NSW Police who are trained to deal with these events. I have spoken to Police Commissioner Andrew Scipione and have full confidence the NSW Police are working effectively to resolve the situation. I will provide further information as appropriate."

New South Wales police have issued a statement saying they are trying to make contact with the people inside the cafe.

The statement reads: "There is a police operation underway at Martin Place. Police and emergency services have responded and a number of streets around the area have been closed. The Martin Place train station is also shut. Police are dealing with an armed incident and specialist officers are attempting to make contact those inside a café. Some nearby offices have been evacuated as a precaution. Anyone else in the area encompassing Hunter, George, Elizabeth and Macquarie streets bordering Martin Place is directed to remain indoors and away from open windows. Anyone in the vicinity but outside that area is free to leave their buildings. Police urge members of the public to remain calm and note that an appropriate police presence is in place."

Reports are also emerging that the Royal Opera House has been evacuated after a suspicious package was found.

There is no suggestion at the moment that these two incidents are linked.

Prime minister, Tony Abbott, will address reporters in Canberra at 12.30pm.