The police have also ruled out terrorism links.
It's also believed there were gas cyclinders in the vehicle that was set on fire.
It has now been confirmed one person has died.
They had initially thought the man was running to catch a tram close by, before a nearby police vehicle rushed to the scene.
Footage from the Bourke Street scene shows a man making stabbing gestures at two uniformed officers near a burning auto before he was shot.
The suspected attacker was shot by the police and was taken to a hospital for treatment.
"We are now treating this as a terrorism event", said Victoria Police Chief Commissioner Graham Ashton, who said the suspect was "someone that is known" to police through family connections.
The two others, aged 26 and 58, were in hospital with non-life-threatening injuries.
It then showed a man approach two police officers with what appears to be a knife, and attempt to stab them.More news: Liverpool still heading in the right direction - Klopp
Superintendent David Clayton told the media at a press conference that "passersby were calling out that members of the public had been stabbed".
"Three people have been stabbed". Police say the exact circumstances have not yet been determined.
Victoria Police said the unnamed attacker is in "critical condition" at the hospital following the incident, which left one of the victims dead. He confirms that the offender has been shot and is under police guard.
Clayton added that the bomb squad had cleared the area and deemed it safe, and that fire crews had extinguished the burning vehicle.
"One person has been taken to hospital with a neck injury".
Vision from the scene shows a man lunging at police officers with a knife. Another bystander tries to stop the man by rolling a shopping trolley in his path.
The news report above came before police acknowledged that the man was already on the radar of Australian intelligence. Police initially responded to a report of a auto on fire near the corner of Swanston Street about 4.20pm.
The counter-terrorism command has taken a lead role in the investigation and police have set up a three-block-wide exclusion zone.