Three people have been shot dead in an attack in the Australian state of New South Wales, police said on Thursday, with local media reporting the gunman remained at large and the shooting was a suspected incident of domestic violence.

Police said an operation was underway in the town of Lake Cargelligo, about 611 kilometres (379 miles) west of Sydney, and urged residents to stay indoors.

Emergency services were called to the scene following reports of a shooting in the late afternoon.

Two women and one man were killed, and another man has been taken to hospital in a serious but stable condition, police said.

"A police operation is currently underway at Lake Cargelligo," police said in a statement on social media.

"The public is urged to avoid the area and for local residents to stay inside."

The Sydney Morning Herald newspaper reported the incident was a suspected domestic violence attack and that a gunman was believed to be holed up in the town with a long-arm weapon.

Lake Cargelligo is located in New South Wales' Central West region, and has a population of about 1,100, according to the 2021 census.

The shooting comes one month after two gunmen opened fire at an event on Bondi Beach celebrating the Jewish festival of Hanukkah, killing 15 people in Australia's worst mass shooting in decades.

Australia on Tuesday passed new laws to enable a national gun buyback and tighten background checks for firearm licences in response to the shooting.

New South Wales, which has the most guns of any state in the country, has also passed laws to limit individuals to possession of four guns and mandate gun club membership for licence holders.