A woman has died after being stabbed and then set alight at a Melbourne petrol station

A woman has died after being stabbed and then set alight at a Melbourne petrol station where her alleged attacker told frantic bystanders to "let her burn".

The 42-year-old Bayswater North woman had been airlifted to The Alfred hospital on Tuesday morning in a critical condition with burns to almost 100 per cent of her body, as well as stab wounds.

She died early on Tuesday evening.

After attacking the woman at the service station, the alleged offender, believed to be the woman's partner, fled to a nearby church where he had a tense two-and-a-half hour stand-off with heavily armed police.

Attempts to subdue him with capsicum spray and a high-powered gun filled with small beanbags failed and locals were warned to stay indoors.

The man, 41, finally surrendered when he put down his knife and was taken to hospital with minor injuries where police hope to interview him later.

The dramatic scenes unfolded as motorists were making their way to work in the morning peak period in Melbourne's outer-east.

Witnesses told of their horror at seeing the woman burning alive at the service station in Mountain Highway, Bayswater, about 8.30am (AEST).

Truck driver Beau Fleming told Fairfax Radio Network he pulled over and ran to help the woman with his fire extinguisher in hand, as black smoke billowed from the scene.

Mr Fleming said the woman's attacker threatened a group of about 10 people to keep away.

"(He was) telling her to burn," he said.

"The car was completely engulfed, she was completely engulfed, there was just black smoke pouring out from underneath the servo."

Another witness, Derek McLaughlin, told The Age newspaper online he heard the man yelling "let her burn" at those trying to help.

Another motorist, Darren, drove his four-wheel drive at the attacker.

"The flames were getting big and it was starting to get pretty black and by the time I headed into the petrol station he was hard to see, but I obviously scared him a bit and he ran off," Darren told Fairfax Radio.

"By the time I parked the car a few guys had managed to get in there with a towel and get the towel onto the lady and get her out to safety."

The fire also engulfed a car and a petrol bowser at the service station.

Victoria Police Inspector Terry Kane said the man was in an agitated state and making threats with his knife as police attempted to negotiate with him, but defended the time it took to end the stand-off.

"The name of the game is resolving these things as peacefully as possible and when a person's armed with a knife it can take some time and that's what happened," he said.

"It was a stand-off situation, he was armed with a knife, rather than rush in and try and arrest him there and risk people being injured, we took our time and negotiated with him and eventually he put the knife down and he's been apprehended."

Insp Kane said police fired a flexible beanbag round from a "non-lethal weapon" in a failed attempt to disarm the man. "The idea is if a person's armed with a knife and we want to take them into custody without causing them injuries. That was one option that was used and it didn't work," he said.

Victoria Police has offered to organise counselling for anyone who witnessed the fire, while homicide squad detectives have appealed for anyone with footage of the incident to come forward.

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