“There are guns drawn and they are yelling at him to put the knife down but he doesn’t seem interested in that.”

She said the man was “just wandering” around holding the knife by his side while police were surrounding him with their guns, tasers and pepper spray drawn.

A few minutes later, the woman said the man was crossing the road to a park, before he crossed back over to the car park.

“Oh my god, here come more police … He is moving back to the car park again. And we now have two more police vehicles.”

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Several shots were then heard live on air.

“Oh shit, they are shooting. They have just shot … I can’t see if they have shot him but there have just been three or four rounds expelled.”

The woman said police tape was being set up and paramedics were moving towards the area where the shots were fired.

“It looks like it’s taken him down, because they aren’t rushing at all in any direction. They are just securing the scene now.”

Police said they were called to reports of a man armed with an edged weapon on Hutchinson Street in Lilydale about 8.30am.

“A police firearm was discharged and the man received an injury to the upper body,” the spokeswoman said.

“He is receiving medical treatment at the scene.

“The incident is under investigation and Professional Standards Commands have oversight.”

An Ambulance Victoria spokesman said the man was believed to be in a serious condition and was being treated for upper body injuries.

The air ambulance helicopter has been dispatched.

Anyone who witnessed the incident or with dash cam footage is urged to contact Crime Stoppers on 1800 333 000 or submit a confidential report online at www.crimestoppervic.com.au.