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According to reports, the police operation was launched at the Bay Street apartment in Brighton following reports of an explosion.
The emergency services, including SES crews, were called to the scene where they also located the body of a man who appeared to have been shot in the foyer of the building.
Police said it appeared the man in the foyer was shot dead and specialist police were now attempting to negotiate with a man in one of the apartments.
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Victoria Police expert units are currently at the scene.