Australia, a staunch ally of the United States and its escalating action against Islamic State in Syria and Iraq, has been on high alert for attacks by home-grown militants returning from fighting in the Middle East.

News footage showed hostages holding up a black and white flag displaying the Shahada, a testament to the faith of Muslims. The flag has been popular among Sunni Islamist militant groups such as Islamic State and al-Qaeda.

At least five hostages were released or escaped yesterday, with terrified cafe workers and customers running into the arms of paramilitary police.

The incident forced the evacuation of nearby buildings and sent shockwaves around a country where many people were turning their attention to the Christmas holiday following earlier security scares.

In September, anti-terrorism police said they had thwarted an imminent threat to behead a random member of the public and days later, a teenager in the city of Melbourne was shot dead after attacking two anti-terrorism officers with a knife.

The siege cafe is in Martin Place, a pedestrian strip popular with workers on a lunch break, which was revealed as a potential location for the thwarted beheading.

Australian National Imams Council condemn criminal act unequivocally in joint statement with the Grand Mufti of Australia

In the biggest security operation in Sydney since a bombing at the Hilton Hotel killed two people in 1978, major banks closed their offices in the central business district and people were told to avoid the area.

Muslim leaders urged calm. The Australian National Imams Council condemned “this criminal act unequivocally” in a joint statement with the Grand Mufti of Australia.

Concerns about an attack in Australia by Islamists have been growing for more than a year, with the security agency raising its national terrorism public alert to “high” in September.