Police shot dead a man who stabbed two people on a busy street in south London on Sunday in what officials described as a terrorist incident believed to be related to Islamist militancy.
Police said in a statement that a hoax device was found strapped to the body of the man killed by armed officers.
One man was being treated for life-threatening injuries after being stabbed, a woman suffered less serious wounds and another woman was hurt by glass after an officer fired his weapon, the statement from London's Metropolitan Police said.
Some witnesses said the man had been armed with a machete and one said he was wearing silver canisters on his chest.
Footage filmed on the high street in the Streatham district of south London showed two men in plain clothes - one in a hoodie and one with a police baseball cap - pointing their guns at a body on the pavement nearby.
"The incident was quickly declared as a terrorist incident and we believe it to be Islamist-related," said Lucy D'Orsi, deputy assistant commissioner in the Metropolitan Police.
Police said the situation had been contained. Chris Wells was in a shop in Streatham with his daughter when they heard three gunshots outside.
"People just came running in screaming and upset, shouting about a gun. We ran to the back of the shop and were locked in," he told Reuters.
"We tried to leave to get away and I saw a man in a hoodie with a gun, which I now know was a plainclothes officer," he said. "And another officer shouted at us to get back inside because there was a bomb threat."
'Three gunshots'
Sky News said it understood that the man shot dead was "under active police surveillance" and had been released from prison in January.
"An investigation is taking place at a pace to establish the full facts of what happened," Prime Minister Boris Johnson said in a statement. He said his government would announce plans on Monday for making changes to the system for handling people convicted of terrorism offences.
Sky quoted Gulled Bulhan, a 19-year-old student from Streatham, as saying he witnessed the shooting.
"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," Bulhan said. "The man was then shot. I think I heard three gunshots but I can't quite remember."
The last such incident in London was in November when police shot dead a man wearing a fake suicide vest who stabbed two people to death and wounded three more before being wrestled to the ground by bystanders.
That attack, at London Bridge, was carried out by a man with Islamist militant sympathies. He had been jailed for terrorism and released early.
London's mayor Sadiq Khan said in a statement after Sunday's incident: "Terrorists seek to divide us and to destroy our way of life - here in London we will never let them succeed."
