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Moment knife-wielding man shot by Melbourne police broadcast live on radio

A knife-wielding man has been shot by police at a Melbourne shopping centre, with the terrifying incident broadcast live on radio.

The man suffered life-threatening injuries in the Lilydale Marketplace shooting shortly after 9am today.

The incident was heard live on 3AW when a woman called into the station.

"Oh s*** - they are shooting. There's just been three or four rounds," the woman, named as Pauline, said.

She did not see shooting, but described the confrontation as shots rang out.

The man was seen walking near the shopping centre as police told him to put down the knife, Pauline said.

"He was just wandering. I don't know if he meant to do anything," she said.

"He wasn't in an agitated state. He wasn't waving the knife. He was just holding it.

"I don't know what he did to cause them to let loose with gunshots."

When asked if she was OK, Pauline replied "(it's) life these days, isn't it?"

Victoria Police said officers had tried to speak with the man but he refused to drop his weapon.

He was shot in the upper body and flown to hospital.

Video footage has also been posted to Facebook, showing a man holding a knife and talking to police.

The incident is being investigated with oversight from the force's internal ethics body, Professional Standards Command.