"A man was arrested at the scene and has been taken to hospital under police guard in a critical condition", police Superintendent David Clayton said.
Police said the driver got out of the vehicle, which then caught fire, and attacked three bystanders with a knife before being fatally shot by police.
The Melbourne attacker and some of his family members were known to counter-terrorism police.
The overwhelming majority of attacks IS claims are undertaken by men acting in its name but who have no operational links to the group. He succumbed to the gunshot wounds in the Royal Melbourne Hospital.
The news report above came before police acknowledged that the man was already on the radar of Australian intelligence.
Shire Ali is understood to have previously been investigated for his association with others linked to terrorism.
"The assessment was that person was not a threat at that time", Deputy Commissioner McCartney said.
One neighbour said Shire Ali had moved in about a year ago with his wife and young son.
The perpetrator, Hassan Khalif Shire Ali, 30, had his passport cancelled in 2015 after it was learned that he planned to travel to Syria, police said.
Police have also credited the "9-11" public response - so named after those on board United Airlines Flight 93 who vainly fought to take back control of the plane from terrorists - for keeping a sense of calm during Friday's attacks.
He said there would be a strong police presence in the city. For further updates follow Victoria Police.
Video posted to Twitter and broadcast on television showed Shire Ali swinging a knife at two police officers, while the truck burned in the background, before he collapsed when one shot him in the chest.
"You're trained to shoot to kill, not to shoot to wound".
Commissioner Ashton also says there was no suggestion that Khalif was inspired by James "Dimitrious" Gargasoulas, who is now on trial facing six charges of murder after allegedly mowing down pedestrians in January 2017. The person is known to police.
Prime Minister Scott Morrison said the national terrorism advisory remained at "probable", the midpoint of a five-tier system, and told reporters in Sydney that radical Islam was the issue.
One woman said she believed the parents, a daughter and a son still lived at the house.
"I'll never accept that violent extremism should be a way of life for a big city like Melbourne".
"But here in Australia, we would be kidding ourselves if we did not call out the fact that the greatest threat of religious extremism in this country is the radical and unsafe ideology of extremist Islam", he said.
An investigator told The Age: 'There are many people who have decided they will not be intimidated by terrorists and will take whatever actions they can'.
He said: "I continue to be proud of all our members" efforts. He later died in hospital. I thought it was a vehicle backfiring but there was flames coming out of the auto.
He added: "These are traumatic events, they are terrifying".