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Police officers position themselves at a corner near Lindt cafe in Martin Place, where hostages are being held, in central Sydney December 15, 2014.JASON REED/Reuters

Prime Minister Stephen Harper and other Canadian government officials were closely watching what was being described as an apparent hostage taking in Australia's largest city.

"Canada's thoughts and prayers are with our Australian friends," Harper tweeted.

Police in Sydney said they were dealing with "an armed incident," but wouldn't confirm hostages were being held inside the Lindt Chocolat Cafe in Sydney.

Television footage shot through the cafe's windows showed several people with their arms in the air and hands pressed against the glass.

TV footage showed two people inside the cafe holding up what appeared to be a black flag with white Arabic writing on it.

Australian Prime Minister Tony Abbott refused to speculate on whether the incident was linked to terrorism.

Foreign Affairs Minister John Baird tweeted late Sunday that he was in touch with his Australian counterpart Julie Bishop.

"We continue to monitor the situation in Sydney closely," Baird tweeted.

The situation in Australia came nearly two months after Harper and Baird were at the centre of a crisis that gripped Ottawa, where a lone gunman killed a Canadian soldier and then stormed the Parliament Buildings before being gunned down by security.

A spokesman for Baird said late Sunday that the government is in close contact with its diplomatic posts in Australia.

"We urge all Canadians in Sydney to use extra precaution and limit their movements as authorities handle this situation," Rick Roth said in an emailed statement.

"We have offered Australia any assistance Canada can provide."

Canada has a consulate in Sydney that is roughly one kilometre from where the cafe involved, but Baird's office said all staff at the mission are safe and accounted for.

With files from The Associated Press