British police on Sunday shot dead a man in London wearing a "hoax device" and suspected of stabbing two people, leaving one of them with life-threatening injuries, in an "Islamist-related" terrorist incident.

The Metropolitan Police said armed officers responded immediately "as part of a proactive counter terrorism operation" when they shot the attacker, who was declared dead at the scene - a busy south London street packed with Sunday shoppers.

An eye-witness described seeing a man "with a machete and silver canisters on his chest" fleeing from police before they opened fire. Sunday's events in Streatham, a largely residential neighbourhood in the capital, came just over two months after a convicted terrorist on early release from prison was shot dead by police on London Bridge after he stabbed two people to death.

The government responded by announcing longer sentences for terrorism offences, an end to early release and an increase in the counter-terrorism police budget in the coming financial year. The latest attack unfolded at around 2:00 pm (1400 GMT) on Streatham High Road, a busy thoroughfare lined with shops.

The Met said a device was found strapped to the suspect's body and, after cordons were put in place, "it was quickly established that this was a hoax device". "The incident was quickly declared a terrorist incident and we believe it to be Islamist-related", police said. Three victims were taken to local hospitals, with one man's condition "life-threatening" and a woman described as receiving non-life threatening injuries.