Sydney gunman Man Monis was a self-obsessed fantasist who grew increasingly defiant as he edged closer to launching his deadly attack, an inquest has heard.

Two staff members of a Sydney cafe have revealed how they plotted to stab a gunman who held them hostage during a 16-hour siege in December.

Australia’s prime minister has said the deadly Sydney cafe siege may have been preventable, as the chorus of critics demanding to know why the gunman was free on bail despite a string of violent charges grew louder.

A major police operation is under way in downtown Sydney, where several people inside a chocolate shop and cafe could be seen through the windows with their hands held in the air.