It's understood the male driver ploughed through a tram stop and struck three pedestrians before colliding with two other vehicles on Russell Street.
The crash, which occurred on the corner of Bourke and Russell Street at about 6.30pm on Friday, involved a white Kia, a white Ford Falcon and a grey Mazda.
A 26-year-old Melton West man has been taken into custody, with the driver seen perched on the roof of his car just moments before his dramatic arrest.
Comment:
Two officers are seen pulling the man, wearing all-white, off the roof and onto the ground before bundling him towards a waiting police car in handcuffs.
Superintendent Zorka Dunstan said the driver was known to police for mental health interactions and would undergo a mental health assessment.
She confirmed five people had been injured - three pedestrians in the vicinity of the tram lines and two people inside the grey Mazda, which was an Uber.
The person inside the third car was killed in the collision, with the superintendent sending her condolences to their loved ones.
Supt Dunstan said police had ruled out terrorism as a potential motive.
'The good thing was we had a quick arrest. At this stage there are no terrorist links and it is a person with mental health issues,' she said.
Graphic videos taken at the scene show pedestrians frantically tending to two people outside a McDonald's after they were mowed down.
People can be heard screaming as others render first aid to the two injured people as police officers, paramedics and firefighters swarmed the scene.
One witness said people were spitting at the alleged driver, who appeared 'calm'.
'People were angry on him, spitting on him,' she told the Herald Sun.
Another posted scenes of the carnage to social media.
'This is damn scary! It was a 'BOOM!' then this happened in the very centre of Melbourne CBD!' the man wrote.
Witnesses at the scene shared images of the wrecked cars on social media
'I thought it was a bomb, upon hearing it,' one man told the Herald Sun, while his drinking partner recalled hearing a 'bloody big crunch'.
Victoria Police said in a statement: 'It's understood a vehicle has struck several pedestrians before colliding with two vehicles near Russell and Bourke Street about 6pm. The driver of the vehicle was arrested at the scene and is in custody.
'There is no ongoing threat to the community, and we will provide more information when available. Police have closed Bourke Street from Swanston Street through to Exhibition Street.'
Ambulance Victoria said paramedics had treated five people at the scene.
'One person has been taken to the Royal Melbourne Hospital in a serious condition,' the spokeswoman said.
Two others have been taken to the Alfred in a stable condition while a fourth was transported to St Vincents also in a stable condition.
Road authorities said: 'The intersection of Bourke Street and Russell Street in Melbourne's CBD is closed in all directions, due to an emergency services incident.'
Yarra trams have suspended all trams along Bourke and Swanston Street as commuters are told to expect extensive delays.
The scene of the crash has been cordoned-off to the public with one of the three vehicles involved later covered with a blue tarpaulin.
The incident comes six years after six people were killed when a driver deliberately ran down pedestrians on Bourke Street.
Mentally ill people should not be allowed to buy cars. Normal people shouldn't be allowed either. Only criminals. Criminals are allowed to purchase or steal cars in any way they can.