Police used capsicum spray and then attempted to use a Taser before an officer fired one shot.

The confrontation took place in the car park of a Hungry Jack's at Hoxton Park just after 11.35am on Tuesday.

The woman, aged 22, was drinking a soft drink with one hand and holding a 20-centimetre kitchen knife in the other when passers-by by rang triple zero.

"One of the police officers resorted to using a firearm, discharging one shot, striking the female in the chest," Assistant Commissioner Frank Mennilli said.

"Police rendered CPR to the female but unfortunately she died shortly afterwards."

Footage just moments after the incident, recorded on a phone by a passenger in a passing car, shows five uniformed police surrounding the woman.

Witnesses said they saw a confrontation between the woman and police, before she lunged towards one of the police officers.

"They tried to talk to her a little bit, then she kind of lost it," witness Ashton Tuimaseve told Channel Nine.

"She started charging the male officer, the male officer was backing up, looking like ... he was not wanting to do anything, then he fired one shot and it hit her in the chest.

"I think at the time she was being Tasered; that's what might've slowed her down a little bit."

Mr Tuimaseve said that, after the woman was shot, she "acted a bit groggy then just dropped".

Police said the woman was initially spotted in the neighbouring suburb of Carnes Hill with the knife before she made her way to the Hoxton Park fast-food outlet.

She was seen walking around the Hungry Jack's car park for several minutes before police arrived.

Mr Mennilli said a number of people called triple zero after seeing the woman "walking around with a large kitchen knife".

He said the officer who fired the fatal shot was "distraught".

Mr Mennilli offered his condolences to the family of the woman who died. "This is a tragic situation," he said.

Mr Mennilli said that, from what police had been told, the woman was not with anyone when confronted by police.

Ayman Sobbi lives in a house opposite the fast-food restaurant and was about to take a shower when he heard two gunshots.

"I saw another police officer get out of another car and he waved his hands around and from there I heard two gunshots," Mr Sobbi said.

"And the girl that was on the corner was then on the floor and the police officers were trying to resuscitate her," he said.

A NSW Ambulance spokeswoman said she died at the scene.

"NSW Ambulance responded to reports of a gunshot wound ... the patient has since died," the spokeswoman said.

Police said a critical incident team from the State Crime Command's Homicide Squad and assisted by investigators from South West Metropolitan Region will now investigate all circumstances surrounding the incident, including the woman's actions before the police intervention and the discharge of a firearm.

That investigation will be overseen by the Professional Standards Command.

All information will be forwarded to the coroner.