Police are urging the public to go about their business as usual on Tuesday.
Officers will continue to maintain a perimeter around a cafe at the corner of Martin Place and Elizabeth streets overnight where a man is holding a number of hostages.
People intending to travel to the Sydney CBD, away from the cordoned off area, are advised to go ahead with their plans.
Traffic and Highway Patrol police have cordoned-off parts of Hunter, Macquarie, King and Elizabeth streets.
Elizabeth Street between Hunter and King Streets – closed to all traffic
Elizabeth Street – northbound between Market and King Street – closed to all traffic
Phillip Street – between King and Hunter Streets – closed to all traffic
King Street – between Elizabeth and Phillip Streets – closed to all traffic
Macquarie Street – between St James Road and Hunter Street – closed to all traffic
Deputy Commissioner Catherine Burn has commended the public for its patience during the ongoing operation.
"You, the community, made our job much easier than it could have been," Deputy Commissioner Burn said.
"We only hope that co-operation and understanding continues tomorrow as we work to bring about a peaceful resolution to this situation."
Bus services will run according to regular schedules, although some routes will be diverted around the affected area.
Train services will operate normally although Martin Place station remains closed.
People intending to travel to the Sydney CBD, away from the cordoned off area, are advised to go ahead with their plans.
Those affected by the operation are advised to contact their employers, monitor media reports and seek advice via the NSW Police website and social media platforms.
A gunman continues to negotiate with police almost nine hours into a hostage siege at the Lindt Chocolat Cafe in Martin Place in the heart of Sydney's CBD.
Chris Reason, a journalist from Channel Seven which occupies a nearby building, said in posts to social media site Twitter that the gunman appeared to be rotating hostages, forcing them to stand against windows for as long as two hours at a time.
"From inside Martin Place newsroom, we've counted around 15 hostages - not 50 - mix of women, men, young, old - but no children. — Chris Reason (@ChrisReason7) December 15, 2014
Mr Reason said the gunman could be seen clearly, wearing "a white shirt, black cap, unshaven, holds [possible] pump action shotgun".
Five hostages have fled the Lindt Chocolate Cafe in Martin Place, hours after a gunman first holed himself up in the store and forced hostages to display an Islamic flag.
Ten's Eyewitness News, meanwhile, has published reports on social media site Twitter claiming that the gunman has made two demands.
Ten said there were two bombs in the cafe and two others placed elsewhere in the CBD, basing the information on an interview with two hostages who phoned the network. Other media outlets, including radio stations 2UE and 2GB and the Nine Network, made similar reports.
Earlier, two female cafe workers ran from the building at about 5pm. Three men escaped about an hour earlier.
The women, appeared to be aged in their 20s, ran out of the cafe a few seconds apart and into the arms of police officers. One of the two appeared to collapse as she rounded the corner from Martin Place into Elizabeth Street.
They fled from an office foyer on Martin Place that adjoins the cafe. Both were wearing brown Lindt aprons.
Television footage of the men showed two of them running from the front of cafe on Martin Place. A third, dressed in what appeared to be a Lindt uniform, is shown escaping out a side door on Phillip Street.
A heavily armed police officer left the building after the men.
Police negotiators have made contact: Burn
Deputy Police Commissioner Catherine Burn confirmed the three male hostages had made it out.
"We do not have any information to suggest anyone has been harmed at this stage," she said.
"Police negotiators have had contact and will continue to have contact."
She also said police could not confirm how many people remained inside the Lindt cafe in Martin Place, but it was fewer than 30.
There are reports that one of the hostages is now speaking to police.
The Deputy Commissioner was unable to say how many hostages were in the building.
Ms Burn said police did not yet know why the gunman was taking the action he has.
"Those motivations are not known and it would not be good to speculate," she said.
"We know have numerous police working on who this person is and what those motivations might be."
Sydney's CBD has been in lockdown as police negotiate with a gunman who stormed into the busy cafe on Monday morning.
In extraordinary and terrifying scenes, hostages could be seen through the cafe's windows with their hands held in the air, while heavily armed police surrounded the building.
A number of hostages were being forced to hold an Islamic flag against the window shortly after the siege began at 9.45am.
Thousands of workers across the city have been sent home early and some of the city's major buildings evacuated.
They include the Opera House, the State Library, Channel Seven, the NSW parliamentary executive offices, the NSW Supreme Court's criminal courts, the Downing Centre, and several city legal chambers.
An unknown number of staff and customers are being held at gunpoint inside the cafe. It was earlier reported that 20 hostages were being held.
No known motive
NSW Police Commissioner Andrew Scipione said police will still determining the offender's motivation and where he was from.
Mr Scipione said police did not know the meaning of the flag held against the window.
The incident has not yet been confirmed as a terrorist attack.
Mr Scipione said hundreds of police were at the scene and ready to escalate their response if needed.
Baird, Abbott and Shorten speak
NSW Premier Mike Baird said: "We are being tested today in Sydney."
"The police are being tested, the public is being tested, but whatever the test we will face it head-on and we will remain a civil, democratic society," he said.
"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."
In a nationally televised address, Prime Minister Tony Abbott said he could think of "almost nothing more distressing, more terrifying than to be caught up in such a situation".
"Our hearts go out to these people," he said.
"We have to appreciate that, even in a society such as ours, there are people who would wish to do us harm.
"Australia is a peaceful, open and generous society. Nothing should ever change that and that's why I would urge all Australians today to go about their business as usual."
He said the National Security Committee of Cabinet has convened for briefings on the situation.
Opposition Leader Bill Shorten said Australians were shocked "but we won't be shaken".
"At times like this it is more critical than ever that the Australian community be solid, stick together and be united," he said.
Blue sports bag
A woman is believed to have raised the alarm at 9.44am when she saw a man outside the cafe carrying a blue sports bag with a gun inside.
There are reports that there could be two gunman inside the cafe, although police have not confirmed this.
Within minutes, police surrounded Martin Place.
Negotiators are attempting to speak to the gunman, police said.
"Police urge members of the public to remain calm and note that an appropriate police presence is in place," police said in a statement.
Terrified customers in the cafe could be seen holding an Islamic flag - which is black with white writing on it - up against the glass window.
The flag appears to be a Shahada flag, not an Islamic State flag, but is associated with Islamist and jihadist movements.
Just before 12.30pm, police tackled a man to the ground about 200 metres from the cafe and a police officer was seen with his foot on what appeared to be a small black handgun.
However, police later said the arrest was not related to the siege.
The cafe is right in the middle of the banking and retail district, and is usually packed with Christmas shoppers at this time of year.
The federal government has been warning for months that a terrorist attack in Australia could happen.
Channel Seven evacuated
The Channel Seven newsroom, which faces Martin Place, was evacuated, along with the Macquarie Bank and Westpac offices in the area.
The Martin Place studio is Seven's main newsroom and is home to breakfast show Sunrise andThe Morning Show, which was on air when news of the siege broke about 9.45am.
The network was originally running a live-stream of the siege, but was asked to take it down for security reasons.
It is unknown if any Seven staff are among the hostages. Channel Seven has shifted its network operations to Melbourne during the siege.
State Parliament, which is one block away from the cafe, has also been closed to the public, while David Jones' flagship store in the city was also evacuated.
Office workers as far away as Circular Quay reported that they were being sent home just before midday.
Police said office workers on Hunter, George, Elizabeth and Macquarie streets bordering Martin Place had been told to stay indoors and away from open windows. Anyone outside that area was free to leave their buildings.
Trains between Central and Bondi Junction were initially stopped, but the Transport Management Centre said services resumed about 10.45am. However, Martin Place train station has been closed and trains are not stopping there.
A spokesman for federal Transport Minister Warren Truss said: "The airspace over the Sydney CBD is not in shut down. There are choppers in the air and air traffic is being rerouted according. At this stage no impact on the air traffic network."
The Department of Education and Communities' Safety and Security Unit has notified public schools of the hostage situation.
All schools have been asked to assume "white level" lockout, which means no school group is to leave the school grounds.
Journalist in shop
Journalist Chris Kenny, who was in the Lindt cafe about 20 minutes before the siege began, said he understood the automatic glass sliding doors had been disabled.
"I did speak to a couple of people who saw a bit more of this unfold than I did," he said.
"One woman said she tried to go into the shop just after I came out with my takeaway coffee but the doors wouldn't open.
"So obviously whoever is doing this has disabled the automatic glass sliding doors to stop anyone else going in and she said immediately she could see there was a weapon.
"She mentioned it being taken out of a blue bag and people were straight away asked to put up their hands."
A man who gave his name only as Bruno said he'd worked in the cafe for six months.
"I was supposed to start at 10am," he said while visibly shaken.
That was about 15 minutes after the siege started and he was unable to get inside.
Broadcaster Ray Hadley claimed on Monday to have spoken on the phone to one of the hostages.
Hadley said on 2GB that the male hostage was "remarkably calm" when relaying information over the phone from the gunman about 1pm on Monday.
Hadley said he could hear the gunman talking in the background during the phone conversation.
The gunman wanted the hostage to speak live on radio, a demand that Hadley said he refused.
There have since been reports that Hadley has spoken to the hostage again.
In September this year, police conducted a series of major anti-terrorism raids across Sydney. Following those raids, police alleged Islamic extremists were planning to behead a person in Martin Place in Sydney's CBD.
Shortly after the siege began, the US Consulate sent an "emergency message" to its citizens warning them to stay away from Martin Place.
The message read: "US citizens are strongly encouraged to review your personal security plan, remain aware of your surroundings including local events, and monitor local news stations for updates. Maintain a high level of vigilance and take appropriate steps to enhance your personal security."
Lawyers, courts evacuated
The NSW Supreme Court's criminal courts on King Street in the CBD have been evacuated, as has have scores of staff from the NSW Crown Solicitor's office.
A number of prominent barristers' chambers have also been evacuated, including the Seventh Floor Garfield Barwick Chambers in Martin Place and the Wentworth Chambers.
Other legal chambers such as Sir Owen Dixon have been locked down, along with dozens of government and commercial buildings in the blocks surrounding the siege, including the Reserve Bank and the NSW Department of Transport.
Some staff say they have been moved out of their offices to the "safe" side of their buildings, away from the café.
A Transport Management Centre spokeswoman said the Sydney Harbour Bridge remained open, despite reports to the contrary.
A NSW Police motorcyclist was involved in an accident with another vehicle just after 11am on the Cahill Expressway, resulting in the closure of some approaches to the bridge.
The motorcyclist was treated by paramedics before the road reopened a short time later.
- with AAP, James Robertson, Paul Bibby