Police shot dead a "known terror suspect" who stabbed two officers, a day after the ISIL group called for Muslims to indiscriminately kill Australians.

The 18-year-old, reportedly associated with the al-Furqan group, was killed on Tuesday evening after arriving at a police station on the outskirts of Melbourne to attend a "routine" interview. 

He greeted two members of the joint counter-terrorism team with a handshake before pulling out a knife and repeatedly stabbing both men. One officer fired a single shot that killed him, police said.

We were aware of this young man and had been for number of months.

Ken Lay, Victoria police chief.

"I can advise that the person in question was a known terror suspect," said the justice minister Michael Keenan on Wednesday. "It appears that the shooting by the police officer was in self-defence."

Victoria state police chief Ken Lay said the teenager "had one thing on his mind, and that was to do the most amount of harm to these two people as he could".

"We were aware of this young man and had been for number of months. The fact that the joint counter-terrorism task force was doing work around him indicates our level of concern," he told Fairfax radio.

The acting federal police commissioner, Andrew Colvin, later on Wednesday said the attacker had his passport cancelled about a week ago on national security grounds.

Bruce Giles, a Victoria police commander, said reports that the man had earlier been waving the ISIL flag were being investigated.

The two stabbed officers were in serious conditions, hospital staff said.

It was not immediately clear whether the violence was related to a recent call from ISIL to its supporters to kill in their home countries.

On Monday, the Australian Prime Minister Tony Abbott said the balance between freedom and security "may have to shift", and outlined broad new security powers expected to be introduced to parliament on Wednesday.

Authorities in Australia are concerned about the number of its citizens fighting in the Middle East.

A suicide bomber who killed three people in Baghdad in July was identified as Australian, as were two men recently photographed holding the severed heads of Syrian soldiers.

More than 800 police were involved in a security operation in Sydney and Brisbane last Thursday, which authorities said had thwarted a plot linked to ISIL to behead a member of the public.

Australia recently deployed 600 troops to the UAE to join a US-led coalition fighting against ISIL.

Source: Agencies