There are unconfirmed reports of deaths and injuries after police stormed the building (pictured) following a hostage incident lasting more than 16 hours.
The gunman was wearing an Islamic headband and made hostages hold up a flag which appeared similar to that of Islamic State.
The police operation to end the siege was launched as five more hostages fled the cafe and ran from the building with their arms up just after 2am local time.
Armed police and medics entered the building soon afterwards and five people were seen being taken away on stretchers.
New South Wales Police confirmed development in a Tweet: "Sydney siege is over. More details to follow."
Watch the moment the siege ends:
The hostage taker has been named as Muslim cleric Man Haron Monis, who recently attracted attention by writing offensive letters to the families of Australian soldiers killed in Afghanistan.
He was also sentenced to 300 hours of community service for sending abusive letters to the families of British soldiers killed in that conflict.
Bishop of South Sydney Rt Rev Robert Forsyth told Premier the siege was very close to his office.
He said: "I was more surprised, many thought it would happen, but I would say at first sight I did find it hard to believe.
"It's a place I know very well, it's near one of our churches.
"It's the shock of the unfamiliar, the violence in the midst of something you know so well, I think that's the shock."
People flee from the cafe
Australian prime minister Tony Abbott earlier said he cannot think of a more "distressing or terrifying" event to be caught up in than the unfolding incident.
"Our thoughts and prayers must above all go out to the individuals who are caught up in this," Mr Abbott said.
New South Wales Premier Mike Baird said: "My call goes out to the state to pray for them, to pray for their families.
"Earlier tonight the commissioner and I also had a conference call with the Islamic leaders. They expressed their full confidence and support with what the NSW police are doing, and the commissioner and I thank them for it.
"We are in this together."
Bishop of South Sydney Rt Rev Robert Forsyth speaking to Premier's Aaron James:
