They tried to negotiate with him before Khayre walked out of the building firing the shotgun.
He was granted parole in November last year – four-and-a-half years into his five-and-a-half year sentence.
Police are investigating whether Mr Khayre was really linked to the terror group, since it sometimes claims responsibility for attacks where there is no proof of a connection.
Heavily armed officers arrived at an apartment building on Monday after reports of an explosion and found one man already dead in the foyer. Khayre was acquitted of a plot to attack Sydney’s Holsworthy Barracks in 2009.
Mr Hao was the only person killed during the two-hour siege that Khayre claimed was inspired by Islamic State.
“There have been too many cases of people on parole committing violent offenses of this kind”, Turnbull told reporters.
A fatal shootout in Melbourne on Monday was being treated as a terrorist attack after it was claimed by Islamic State, Australian police said today.
Police shot Khayre dead, with three police officers being injured during the siege.
Yacqub Khayre leaves court in Melbourne, Australia, on December 23, 2010.
It is understood Khayre cut off his parole Global Positioning System security ankle bracelet on Monday to avoid having his movements monitored. He was recognized as a refugee under Australia’s humanitarian migration program and later became a citizen, police said.
Prime Minister Malcolm Turnbull said he would speak with state leaders Friday about changing state laws, so that risky criminals like Khayre were not released from prison on early parole.
“… What is clear here is that we face a growing threat from Islamist terrorism in Australia in our region and around the world”.
Victorian Premier Daniel Andrews said had been compliant with his parole conditions.
Turnbull questioned why Khayre was not behind bars after a string of offences. Three of the men were convicted, while Khayre and the fifth man were acquitted. Their plan was uncovered when police learned that the group, who met regularly at a prayer hall regarded as a hotbed of extremism, were sending money to the terror group al-Shabaab in Somalia.
Victoria Police Commissioner Graham Ashton said police had received a call “from someone claiming to have a hostage in an apartment” at the address and “making threats to the hostage if police intervened”.
Police rescued the woman taken hostage in Melbourne after a standoff lasting longer than an hour in the beachside suburb of Brighton.
A 36-year-old woman from Ripponlea sustained minor injuries after she was held hostage in the ground floor apartment.
On Wednesday morning, Mr Andrews said domestic spy agency ASIO and the Australian Federal Police should be “directly involved as a decision maker” in parole consideration for offenders on terror watch lists or with extremist backgrounds.