He also attempted to attack police who arrived on the scene before being shot in the chest by an officer. He said the attacker was someone known to police through family connections.
Police said they found his pick-up truck full of gas cylinders in what they are now treating as terrorism.
"Three people have been stabbed".
"The exact circumstances are yet to be determined..."
The centre of Melbourne's CBD is in lock down.
The street was closed off and shops, including two large department stores, were evacuated.
Officers had initially responded to a report of a auto on fire on the popular shopping street at 4.20pm (5.20am GMT) on Friday. Only the soles of the person's feet were visible.
"I kept watching", said witness Tony Nguyen, after what he described as a "car bomb".
Trams are not running along Bourke Street or Swanston Street in either direction.
Authorities say Australia's vigilance has helped to foil at least a dozen plots, including a plan to attack downtown Melbourne at Christmas in 2016.
A witness claimed to see a pedestrian struck by the vehicle while another said her friends had seen someone with a knife in the area and she'd been told "he'd stabbed a security guard".
Warning text messages were sent after the attack and police sealed off the downtown area, usually busy with shoppers and diners on a Friday evening.
A SUSPECT has been SHOT DEAD after Terror Attack Melbourne, Australia which left one person dead and two injured. Their condition is not yet know.
"A second person has been taken to hospital with a head injury".
Tweets posted in the area showed a vehicle on fire and smoke reaching up into the sky.
The incident took place at Bourke Street as reported by Victoria Police.
"They ran into a cafe and locked themselves in a kitchen", he said.
One listener said he could see a white sheet over a body.
The news report above came before police acknowledged that the man was already on the radar of Australian intelligence.
"We saw it in our police, whose swift, courageous and decisive action saved lives", he wrote in a post on Twitter.
Another witness said: "Big fire".
He is accused of deliberately driving his auto into pedestrians on the same Melbourne Street in 2017, hitting 33 people and killing six.
Police will investigate a possible copy-cat motive.