Three people died after the 16-hour siege, which came to a dramatic end when armed police stormed the building.
The 50-year-old “lone gunman” at the heart of the hostage crisis, Iranian refugee Man Horan Monis, was also pronounced dead in hospital.
New South Wales Police said a 34-year-old man and a 38-year-old woman were declared dead after being taken to hospital.
One of the hostages killed during the siege was Katrina Dawson, a barrister and mother of two who worked in Sydney’s central business district, while the man has been named as Lindt cafe manager Tori Johnson, 34.
“Katrina was one of our best and brightest barristers who will be greatly missed by her colleagues and friends,” Jane Needham, president of the New South Wales Bar Association, said.
Gunfire at the Lindt Chocolat Cafe in the bustling Martin Place shopping area prompted police to move in just after 2am local time.
Four people were taken to hospital following the siege, including a police officer with facial wounds from gunshot pellets.
Shortly after laying flowers near the scene, prime minister Tony Abbott labelled radical group Islamic State a “death cult” and told a press conference there were questions to be answered over why Monis was freed on bail.
He said: “This has been an absolutely appalling and ugly incident - that’s the only way to describe it. Our hearts go out to the families of Katrina Dawson and Tori Johnson. These were decent ordinary people who were going about their ordinary lives.
“Decent, innocent people who were caught up in the sick fantasy of a deeply disturbed individual.”
He added Monis had “certainly had been well known to the Australian Federal Police ... but I don’t believe that he was on a terror watch list at this time.”
Police deputy commissioner Catherine Burn told reporters today the gunman was “unstable”.
She said: “He was on bail and in terms of that matter, his movements will form part of the critical investigation.
“He has clearly made some statements. This is a man who had a serious history of offences and a history of violence. A man we do believe had some extremist views and we also believe he was unstable.
“We will clearly have a look at all the things we can find out about him so we can determine what might have triggered anything.”
She refused to speculate on the actions of the cafe manager, when asked if he had acted heroically.
“I’m not going to talk about individual actions at all. This will all come out in time but can I just say every single one of the hostages, every single one of those victims was courageous,” she added.
Earlier, police commissioner Andrew Scipione told reporters in Australia’s biggest city that 17 hostages had been accounted for in total, including five who escaped early in the attack.
Mr Scipione said: “This was an isolated incident, it is an isolated incident. Do not let this sort of incident bring about any loss of confidence about working or visiting in our city.
“It was the act of an individual. This should never change or destroy the way of our life. This won’t change our lives, this will not change the things we hold dear in this country.”
The officer said the Lindt cafe had been secured and no explosive devices were found.
He urged people not to “speculate” about what had happened, adding that police believed more lives could have been lost had they not taken action.
“Events that were unfolding inside the premises led them to the belief that now was the time to actually deploy, and they did,” he said.
“I understand there were a number of gunshots that were heard, which caused officers to move towards an emergency action plan.”
Local media reports suggested that commandos from the Royal Australian Regiment had entered the building after the gunman started firing shots.
In addition to the wounded police officer, two women were taken to hospital with non-life threatening injuries and one woman was taken as a precaution.
Ms Burn also said she had spoken to the officer, who had been discharged from hospital.
“What I can say about him is I’ve spoken to him this morning. He was on his way home actually and he was a little bit shaken. His only words to me were I will be back at work tomorrow,” she said.
Police confirmed that a number of hostages had “traumatic injuries” and some had “medical conditions”.
Uninjured hostages are now expected to be interviewed as part of a critical incident investigation by police.
Flags at government buildings will be flown at half-mast in the wake of the tragedy, prime minister Mr Abbott announced.
The end of the siege came soon after the hostage taker was named as self-styled Muslim cleric Monis.
Born Manteghi Bourjerdi, Monis arrived in Australia in 1996 as a refugee, changing his name to Man Haron Monis and assuming the title of Sheikh Haron.
He had attracted attention in recent years by writing offensive letters to the families of Australian soldiers killed in Afghanistan.
Dubbed the “hate sheikh”, he was sentenced to 300 hours of community service for writing the letters.
He was also banned in 2010 from sending “letters of condolence” to the families of British soldiers killed in that conflict.
Monis was also on bail as an alleged accessory to the murder of his ex-wife and for a string of sex claims, police confirmed.
During the stand-off he was said to have demanded to have a flag of the Islamic State militant group delivered to the cafe.
But his former lawyer said he believed Monis had acted alone and was not part of a terrorist conspiracy.
Manny Conditsis told the ABC: “This is a one-off random individual. It’s not a concerted terrorism event or act. It’s a damaged goods individual who’s done something outrageous.
“His ideology is just so strong and so powerful that it clouds his vision for common sense and objectiveness.”
Adam Houda, a well-known Sydney solicitor who had also represented Monis, described him as “mad as a cut snake”.
Fearing a backlash against Muslims, Australians offered to transport them on public transport and showed their support on Twitter with the hashtag #illridewithyou.
Speaking to reporters in Poole, Prime Minister David Cameron said the hostage situation in Sydney demonstrated the risk from Islamic extremists across the world.
“It is obviously very concerning, what has taken place, albeit on the other side of the world but in a country very close to our hearts, and it is a reminder of the threat we face from Islamic extremist terror,” he said.
Lindt & Sprungli, the company whose cafe was at the centre of the hostage crisis, said it was “profoundly saddened and deeply affected” by the death of innocent people.
“We are devastated by the loss of their lives and that several others were wounded and had to experience such trauma,” the company said.
“Our thoughts and feelings are with the victims and their families who have been through an incredible ordeal, and we want to pay tribute to their courage and bravery.”
New South Wales coroner Michael Barnes said families would be offered support as a post-mortem examination got under way.
He said: “Counsellors from the Department of Forensic Medicine will provide counselling and support for any of the bereaved relatives who wish to receive it.
“The state coroner will conduct the inquest as soon as reasonably practicable. At this early stage it is not in a position to identify the issues that will be considered at the inquest.
“The state coroner and staff of the coroners court offer their condolences and respects to the bereaved families and friends of the victims of this tragic event.