Police were called to Williams Parade in Dulwich Hill about 10:20am on Thursday after reports of a stolen vehicle in a car park. Officers were told a man armed with a shotgun was seen inside the van before he set it alight and fled down Union Street towards Laxton Reserve.
Riot squad officers, police in bulletproof vests and the PolAir helicopter were deployed to the area. Forensic investigators were at the scene to "glean any information from that vehicle", Superintendent Despa Fitzgerald said.
Superintendent Fitzgerald said "no shots were fired" at the scene despite earlier reports, although members of the public were threatened. One school was placed into lockdown as part of the response.
A resident named Charlie told ABC News he was told by police he could not return home for a couple of hours after completing a night shift. He said his partner saw a burnt-out car and police told her to go back inside. "They've locked everyone down in the street," he said. He said neighbours witnessed a man steal a car before the owners followed him onto the street and he then "burnt out the car".
Police described the man as Caucasian, in his 20s, about 160 centimetres tall, of short build with shaggy hair, wearing a blue T-shirt and long black pants.
Light rail services have been cancelled between Dulwich Hill and Lilyfield, and a crime scene has been set up. NSW Police asked motorists to avoid the area and urged anyone who sights the man to call Triple Zero (000). Witnesses with mobile phone or dashcam footage were asked to share it with investigators.
The Sydney Morning Herald also reported a major police operation in the inner west.