Video from witnesses at the scene made available to CNN's Australian affiliate Channel 7
show a chaotic scene.
After shots were fired, a female voice, confirmed by New South Wales police to be the lead officer, can be heard saying: "Ah, s***! I'm so sorry, so sorry."
Three women, aged 65, 70 and 82 years, are in a stable condition in hospital. The 23-year-old man who had been wielding the knife was also shot and is in hospital under police guard.
Reports of man with knife
Police say they were called to a mall in Hornsby, a suburb about 25 kilometers north of Sydney, at 11:50 a.m. local time on Thursday (9.50 p.m. ET Wednesday), according to a police statement
NSW Police Assistant Commissioner Denis Clifford told reporters officers approached the man and there was a "confrontation."
"It will be alleged the man approached the police with a large carving knife. The officers each fired shots at the offender. He was wounded several times. Unfortunately some bystanders were also injured with either bullet or fragment wounds," Clifford said.
Clifford said the officers had other options besides their guns, including a Taser, but whether they were realistic options will be determined by an independent police probe.
Clifford told reporters that while the officers had a range of options available to them to respond, but "you can't dictate what option to use in every circumstance."
"This occurred in a matter of seconds in life and death circumstances. Police had to make a critical decision on action they took." Their actions are now the subject of an internal police investigation.
In Australia, federal and state police officers are armed with pistols.
Shooting was 'alarming'
Clifford noted that initial calls reported a stabbing at the mall, but that was later found to be false.
Channel 7 reported witness accounts of people at the mall hearing the barefooted man "babbling incoherently" but also shouting "Allahu Akhbar."
Police tell CNN terrorism was not suspected as a motive in this incident, which they consider to be a mental health issue. The man was known to them and had escaped a psychiatric center the day before.
Clifford admitted the shooting of three innocent bystanders was "alarming."
"But I wonder what might have happened had the officers not intervened and stopped this person with the knife," he added.