NSW Police said a "police operation" was underway near King and Clarence Streets in the city on Tuesday afternoon.

"Please avoid the area," the force said on Twitter.

A witness told AAP a young man armed with a 30-centimetre kitchen knife had been yelling religious statements.

The man in his 20s yelled at police: "f***ing shoot me in the f***ing head", before he was wrestled to the ground by bystanders and a milk crate was placed over his head.

A caller to 2GB radio confirmed the young man had been tackled to the ground.

"He's definitely been detained ... he's been taken away," the caller, Tom, said.

A bloodied woman had been taken out of the Hotel CBD and placed into an ambulance.

"So insane! A random dude just started stabbing people in the city right outside where we were having lunch," @JackHuddo said on Twitter.

An Uber driver said he saw people running away "and next thing I see this guy jumping over the car, he went over the bonnet, and went on top of the car".

"He had a little bit of blood on his shirt," the driver told 2GB.

NSW Police have set up a series of roadblocks in the area.

Australian Associated Press