Two people have been stabbed in an “Islamist-related” terrorist attack in south London, carried out by a man who was only recently released from prison after serving time for terror offences.

It is understood that 20-year-old Sudesh Amman, who was jailed for possessing and distributing terrorist documents in December 2018, had been freed in the past six weeks.

Sam Armstrong, from the Henry Jackson Society, said Amman was thought to have been staying in a bail hostel in Tulse Hill.

He said the society had warned in December that Amman was due for release within the next two months and should not be let out of prison.

Amman, who at the time of his sentencing was 18 years old and had an address in Harrow, north-west London, had been jailed for three years and four months, PA Media reports.

Scotland Yard said armed officers shot dead a man as part of a “proactive Counter Terrorism operation” on Streatham High Road that unfolded at 2pm on Sunday.

Three victims were taken to a south London hospital, with one man’s condition said to be life-threatening but it has since improved. A woman is being treated for non-life threatening injuries.

Police said a second woman received minor injuries believed to have been caused by glass following the discharge of a police firearm.

A device found strapped to the body of the suspect was a hoax, the Metropolitan Police added in a statement.

The identity of the attacker is not yet known but Sky News reports he was under active police surveillance at the time.

Armed police and multiple ambulance vehicles were in attendance and videos posted to social media showed chaotic scenes.

Nardos Mulugeta, 52, a mechanical engineer who lives in Streatham, said he heard gunshots before seeing one victim lying in the street. “I heard a shot and then there was a 20-second gap. Then there were three or four shots together, he said.

“I went over and I saw the first victim, a male victim on the ground, near the White Lion Pub, and people were helping him.

“Then five minutes later a woman came over and said I’ve been stabbed too in the back. And then people starting helping her.

“I saw one body laying down further away. He was face-down between Argos and Iceland. It’s really scary.”

Gulled Bulhan, a 19-year-old student from Streatham, claimed to have witnessed the shooting. He told PA Media: “I was crossing the road when I saw a man with a machete and silver canisters on his chest being chased by what I assume was an undercover police officer – as they were in civilian clothing.

“The man was then shot. I think I heard three gun shots but I can’t quite remember. After that I ran into the library to get to safety.

“From the library I saw a load of ambulances and armed police officers arrive on the scene.”

Bulhan said people began running into nearby stores after the incident: “We were all informed to stay in buildings by armed police, until we were evacuated.”

Boris Johnson posted a tweet thanking the emergency services, adding: “My thoughts are with the injured and all those affected.”

London Mayor Sadiq Khan, said on Twitter: “Terrorists seek to divide us and to destroy our way of life – here in London we will never let them succeed.”

Richard Mustonen-Smith, 59, a response pastor for Ascension Trust, has lived in the area all his life.

He told PA: “I’m shocked it’s happened in Streatham. I’ve been here all my life. We’re always getting accidents down here but not this.

“My grandson was in the Odeon and they got told to go out the back because there was a bomb. They got them to go out of the back of the cinema. They were there to watch a film.

“When it’s a member of your family so close to you you don’t expect it. You’re always worried about your family being on the streets but this is even worse.

“I heard two people got stabbed and apparently one man was shouting Allahu Akbar but people thought he was just a crazy man, so he got away. Apparently he had two rucksacks.”

Prime minister Boris Johnson said he will announce plans on Monday for “fundamental changes to the system for dealing with those convicted of terrorism offences” following the attack.

He added: “Following the awful events at Fishmongers’ Hall in December, we have moved quickly to introduce a package of measures to strengthen every element of our response to terrorism – including longer prison sentences and more money for the police.”