Online car service Uber on Monday offered free rides from Sydney's central business district following a public backlash over an initial surge in prices amid a hostage drama in a city cafe.

Fares on the US-based company's booking app initially rose to a minimum fee of A$100 ($82) for pickups near the siege, more than four times the fare before the drama unfolded.

The price hike was a result of the company's controversial automatic surge pricing.

An armed assailant was holding an unknown number of hostages inside a central Sydney cafe on Monday, police said, with local television showing some being forced to hold up a black flag with white Arabic writing in the window.

Sydney's public transport system was under pressure because of the siege as several businesses in the city, including major banks, evacuated offices and sent employees home.

When first challenged about the increase, Uber tweeted from its official account, "We are all concerned with events in CBD. Fares have increased to encourage more drivers to come online and pick up passengers in the area".

An hour later, after a flurry of critical tweets, Uber said trips from the central business district would be free.

"Uber Sydney will be providing free rides out of the CBD to help Sydneysiders get home safely," Uber said in an emailed statement. "We are in the process of refunding rides."

Uber has grown rapidly around the world in recent months, but it has been dogged by controversy surrounding its aggressive approach to local governments and traditional taxi services.

It is banned in the Netherlands and in New Delhi after a female passenger earlier in December accused one of its drivers of rape.

(IBN)