Khayre wounded three police officers before he was shot dead as he burst out.
Australian police from the bomb squad unit walk near the site where a gunman was shot dead after holding a woman hostage in Melbourne, Australia, June 5, 2017.
Hours after the fatal shootout, the IS claimed responsibility for the attack.
It is understood police are also investigating a report of a phone call made to the Channel 7 newsroom saying the incident was related to Islamic State, he added.
"Three police members have sustained non-life threatening injuries during the arrest - two have been taken to hospital and one was treated on scene".
"He has got a long criminal history dating back many years", he said.
He was on parole when the hostage drama unfolded on Monday night. He cut off his Global Positioning System bracelet after the hostage situation began.
Prime Minister Malcolm Turnbull said he would speak with state leaders on Friday about changing state laws so that unsafe criminals were not released from prison early on parole.More news: Marathon Petroleum Corporation (MPC) Rating Reiterated by Royal Bank Of Canada
It said the attack was carried out "in response to appeals to target citizens of coalition states".
Turnbull questioned why Khayre was not behind bars after a string of offences.
He lived in the Melbourne suburb Roxburgh Park with his mother and police will search their home on Tuesday, as well as continue work at the Bay St serviced apartment block.
In 2009, Khayre was involved in a suicide bombing plot targeting an army base. Three other men were convicted in that case.
Prosecutors unsuccessfully argued that Khayre traveled to Somalia to obtain a fatwa, or religious ruling, in support of the Sydney plot.
Police rescued the woman taken hostage in Melbourne after a standoff lasting longer than an hour in the beachside suburb of Brighton.
Khayre shot dead a man who was working at the apartment complex and held a woman hostage. The hostage was unharmed.
Police earlier said they attempted to negotiate with him but Crisp said later he was not aware of any contact with the gunman. Khayre was said to have beaten up a young woman and headbutted her father during the robbery.
Tightening of parole conditions is now likely to form the centrepiece of a meeting between Mr Turnbull and the state government leaders on Friday, as the Premier said Australians "need to be assured" that individuals who are "a threat to their safety" are not being released on parole.