An Australian Islamic council has called for taxpayer-funded "safe spaces" so young Muslims can express "inflammatory" views without fear in a move slammed as troubling and wrong on Thursday.

News of the request comes just days after a fatal shootout in Melbourne claimed by the Islamic State group, which is being treated as a terrorist incident.

Source: b'Australian police from the bomb squad unit walk near the site where a gunman was shot dead after holding a woman hostage in Melbourne/ Source: Reuters'

In a submission to a parliamentary inquiry into freedom of religion, the Islamic Council of Victoria demanded funding for federal counter-terrorism and anti-extremism programmes be diverted to create the refuges.

"Existing... funding re-allocated to create safe spaces urgently needed by Muslim youth to meet and talk about a range of issues in emotional terms," it said. "(A space) where they can be frank and even use words, which in a public space would sound inflammatory."

Victorian state premier Daniel Andrews said he was "very troubled" by any suggestion for safe spaces where Muslim youth "could be radical". "There is no safe way to rail against the West. There is no safe way to rail against the values that we hold dear. I am very troubled by the suggestion that we might have a space where people could be radical as part of a de-radicalisation programme. That makes no sense to me whatsoever."

Source: b'Victorian state premier Daniel Andrews/ Source: Twitter'

He ruled out any funding for such an initiative. The council argued in its submission that the rise of Right Wing extremist political rhetoric had a created "a culture of surveillance for our families".

"Muslim youth especially are watched everywhere, every day, and this 24/7 surveillance is becoming internalised and leading to serious mental health issues for many Muslims and increasing family tensions," it said.

The council added that words were frequently seen as "more of a crime than actions", and this limited young people's freedoms "to express themselves in ways that do not apply to non-Islamic faith youth".

In Melbourne on Tuesday, a man of Somali background was killed in a gun battle with police when he opened fire following an hour-long standoff after taking a female escort hostage.

It is alleged 29-year-old Yacqub Khayre, linked to a 2009 terror plot targeting Australian Army barracks, had first murdered a Chinese-born Australian man.

Australian officials have grown increasingly concerned over the threat of extremist attacks and have prevented 12 on home soil since the threat level was raised in September 2014.