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SYDNEY (Reuters) - Heavily armed Australian police stormed a Sydney cafe early on Tuesday morning and freed terrified hostages held there at gunpoint, in a dramatic end to a 16-hour siege in which two captives and the attacker were killed.
Authorities have not publicly identified the gunman, but a police source named him as Man Haron Monis, an Iranian refugee and self-styled sheikh known for sending hate mail to the families of Australian troops killed in Afghanistan. He was charged last year with being an accessory to the murder of his ex-wife but had been free on bail.
During the siege, several videos were posted on social media apparently showing hostages inside the Lindt cafe in Sydney's central business district making demands on behalf of Monis.
The gunman, whom hostages referred to as "brother", demanded to talk to Prime Minister Tony Abbott, the delivery of an Islamic State flag, and that media broadcast that Australia was under attack by Islamic State.
Abbott told reporters the man was well known to authorities, had a history of extremism and mental instability, and had targeted innocent people.
"These were decent, good people who were going about their ordinary lives ... who got caught up in the sick fantasy of a deeply disturbed individual," Abbott said of the victims.
Police are investigating whether the two hostages were killed by the gunman or died in the crossfire, said Andrew Scipione, police commissioner for the state of New South Wales.
Around 2 a.m. local time (1500 GMT on Monday), at least six people believed to have been held captive in the Sydney cafe managed to flee after gunshots were heard coming from inside.
Police then moved in, with heavy gunfire and blasts from stun grenades echoing from the building.
"They made the call because they believed at that time if they didn't enter there would have been many more lives lost," Scipione told reporters just before dawn.
Police said a 50-year-old man, believed to be the attacker, was killed. Television pictures showed he appeared to have been armed with a sawn-off shotgun.
A man aged 34 and a 38-year-old woman were also killed, police said. The man was the cafe manager, and the woman was a mother and lawyer, Sydney media reported.
At least four were wounded, including a policeman hit in the face with shotgun pellets. Among the wounded was a 75-year-old woman who was shot in the shoulder, police said. Two pregnant women who were among the hostages were taken to hospital for assessment. All were in stable condition.
Medics tried to resuscitate at least one person after the raid, a Reuters witness said. Bomb squad members moved in to search for explosives, but none were found.
So far 17 hostages have been accounted for, including at least five who were released or escaped on Monday.
The area around the cafe was cordoned off with police tape throughout Tuesday.
Office workers stood in long queues outside florist shops, as hundreds of bouquets formed a makeshift shrine near the cafe, while flags flew at half mast across the country.
Abbott and his wife also laid wreaths at the site and signed condolence books open to the public. A memorial service was held at St Mary's Cathedral, barely a block from where the siege unfolded.
With Australia on edge after the siege, the Department of Foreign Affairs building in the capital, Canberra, was evacuated briefly on Tuesday after a suspicious package was found in the canteen, police said. It was found to be an employee's backpack.
Leaders from around the world expressed their concern over the siege, including Stephen Harper, the prime minister of Canada, which suffered an attack on its parliament by a suspected jihadist sympathizer in October.
Monis was found guilty in 2012 of sending threatening letters to the families of eight Australian soldiers killed in Afghanistan as a protest against Australia's involvement there. He was also facing more than 40 sexual assault charges.
Abbott and security officials questioned why he was not in custody or being monitored more closely."That's precisely the kind of question that members of the public are entitled to ask ... how can someone who has had such a long and chequered history not be on the appropriate watch lists and be entirely at large in the community," Abbott said.
New South Wales Premier Mike Baird said recently that changed laws regarding bail conditions in such cases were being reviewed in the wake of the siege.
A U.S. security official said the U.S. government was being advised by Australia that there was no sign at this stage that the gunman was connected to known terrorist organizations.
Although the hostage taker was known to the authorities, security experts said it was difficult to prevent attacks by people acting alone.
Australia, a staunch ally of the United States and its escalating action against Islamic State in Syria and Iraq, has been on high alert for attacks by homegrown militants returning from fighting in the Middle East or their supporters.
News footage showed hostages in the cafe holding up a black and white banner displaying the Shahada, a declaration of faith in Islam. The banner has been popular among Sunni Islamist militant groups such as Islamic State and al Qaeda.
In September, anti-terrorism police said they had thwarted an imminent threat to behead a random member of the public and, days later, a teenager in the city of Melbourne was shot dead after attacking two anti-terrorism officers with a knife.
The siege cafe is in Martin Place, a pedestrian strip that was revealed as a potential location for the thwarted beheading.
Muslim leaders urged calm. The Australian National Imams Council condemned "this criminal act unequivocally" in a joint statement with the Grand Mufti of Australia.
A social media movement showing solidarity with Australian Muslims was also gathering steam.
Additional reporting by Jane Wardell, Matt Siegel, Swati Pandey, Wayne Cole and Jason Reed in Sydney and Mark Hosenball in Washington; Writing by Dean Yates and Paul Tait; Editing by Will Waterman; Editing by Will Waterman