Police said the two officers met the 18-year-old Narre Warren man outside the Endeavour Hills police station before he lashed out at the officers with a sharp instrument. He then ran towards the police station and was shot.

Onlookers at the scene — who did not want to be named — said the dead man had been shouting insults at Prime Minister Tony Abbott and the Australian government in general in the moments before he was shot.

Federal police sources say the AFP officer was stabbed multiple times in the face, shoulder and abdomen.

The two stabbed officers, one from Victoria Police and one from the Australian Federal Police, were working together as part of a joint operation on counter-terrorism between the AFP and Victoria Police. The operation is believed to have been running for the past two to three years.

Police say the man was involved in an ongoing investigation, but AFP Commander Bruce Giles would not confirm whether the 18-year-old's passport was among those that had been suspended, as had been reported.

However, he said, reports the man had been displaying Islamic State flags in the lead-up to police contacting him appeared to be correct.

Victoria Police Assistant Commissioner Luke Cornelius said the man had been asked to come to the police station to discuss behaviour "which had been causing some concern". When the man pulled up at the station he stabbed the two officers as they went to greet him.

"I want to make it very clear that the individual concerned who has died tonight was invited and did come of his own free will to the police station," he said.

"Our members had no inkling this individual posed a threat to them and as far as we were concerned it was going to be an amicable discussion about that individual's behaviour.

"It is also clear to us that individual has without any warning, produced a knife and assailed them with a knife.

"It's absolutely clear to us our members had no choice but to act in the way that they did."

Police sources said it was the Victorian officer who shot the man.

The federal officer was taken to The Alfred hospital in a critical condition with life-threatening injuries, but he is now in a stable condition, police said.

The Victorian officer was taken to nearby Dandenong Hospital in a less serious condition suffering stab wounds to the arms.

A bomb-disposal unit was called to the scene and inspected the car and the police station.

Mr Giles said although the man did not make a bomb threat against police, the bomb squad was called to inspect his car for explosive devices.

"Whenever we deal with individuals who have clearly aimed to cause harm to police we go to exceptional lengths to ensure that the crime scene is safe" he said.

Mr Giles said the man had been acting alone and did not appear to be working with others.

Police set up a crime scene around the perimeter of the nearby Endeavour Hills shopping centre.

Homicide squad detectives are investigating the incident for the coroner, and Professional Standards Command members are overseeing the investigation.

A crowd of about 50 onlookers gathered about 10pm, and about a  dozen officers directed onlookers to leave.

Premier Denis Napthine was briefed by the Chief Commissioner of Police, Ken Lay, on events.

Shafi Miya, who works at the petrol station opposite the Endeavour Hills police station, said he heard a shot fired sometime between 7.30pm and 8pm.

He said police had taped off the police station and Heatherton Rd was closed in both directions.

Ambulance Victoria confirmed that paramedics attended the scene but would not provide further details.

The outside of Endeavour Hills Police station was a hive of activity 12 hours after the shooting as police officers continued to investigate the circumstances surrounding Tuesday night's tragic events.

About 15 vehicles were parked inside and near the area cordoned off by police tape, and a police caravan was set up to the side of the station.

A spokesman said the coroner arrived on scene about 7am to assist homicide detectives.

State Emergency Services crews have put up fencing to protect the crime scene, police spokesman Sergeant Kris Hamilton said, and an SES tent has been erected outside the police station.

Sergeant Hamilton said the forensics team arrived about 7.15am, and that it would take investigators some time to "process" the crime scene before the body can be removed.

Police believe a Nissan Pulsar parked outside the day care centre to the left of the police station is the dead teenager's car.

The Islamic Council of Victoria said the Endeavour Hills incident highlighted a failure by the Australian Government to deal with alienation and disaffection.

In a statement that called for a full and objective investigation, the council said the incident "on face value, should not have cost a young man his life and put two police officers in hospital".

"The tragedy highlights the real cost of a failure to deal with these serious issues and why we have made numerous calls on the Australian Government to deal with the root cause of alienation and disaffection of people such as this," the statement said.

"This is not about laying blame but about a genuine need to identify the root causes and deal with them so that no further tragedies such as this occur again."

The council said they were focusing on supporting the family of the teenager.

"There will be many questions that they will want answers to and in the fullness of time we expect the events of last night will become clearer."

Shadow Attorney-General Mark Dreyfus said the incident last night was "very concerning".

He said Labor was waiting on more details before commenting further but his thoughts went out to the wounded AFP officer's family.

With Caroline Zielinski, Alexandra Back, Patrick Begley, Tammy Mills, Henrietta Cook

Source: The Age