Part of a Sydney suburb was sent into lockdown on Friday after a man with a gun allegedly set fire to a car and threatened people before fleeing the area on foot.

NSW Police said officers were called to a carpark on Williams Parade in Dulwich Hill around 10.20am after a report of a stolen vehicle.

They were told a man with a firearm had been seen inside the vehicle, before allegedly setting fire to it.

The man – described as being of Caucasian appearance, aged in his 20s, about 160cm tall with a thin build and shaggy hair – ran away and was last seen on Union Street. He was wearing a blue T-shirt and long black pants.

A witness told ABC News that residents had been told to stay inside as heavily armed police, firefighters and the PolAir helicopter converged on the scene.

Nearby schools, cafes and other businesses had been put into lockdown for several hours, according the Sydney Morning Herald, which reported the incident arose due to a dispute over a stolen van.

Superintendent Despa Fitzgerald said members of the public were allegedly threatened during the incident, but no shots were fired.

“Do not approach this person,” she urged.

Road closures were still in place on Friday afternoon.

NSW Police have released an image of a man they believe can assist with inquiries. They are appealing for anyone in the Dulwich Hill area with mobile phone or dashcam vision relevant to the incident to share it with the investigators.