Police later confirmed that one man, 37 years old, had died.
"It would appear that shots have been discharged from a vehicle in this area into a crowd that was standing outside the nightclub", Victoria Police Inspector Andrew Stamper told reporters.
Chapel Street was home to a number of popular nightclubs and the shooting on Sunday occurred while many people were still out.
They believe several people were shot outside the two-story Love Machine club early today but have made no arrests so far.
Bloodstained clothing left in the middle of a road alongside bullet casings seem to be the focus of detectives and forensic police who are scouring the area for clues.
Police were expected to provide updates later Sunday.
A Victoria Police personnel works at the scene of a multiple shooting outside Love Machine nightclub in Prahran, Melbourne April 14, 2019. The vehicle was later found burnt out in Wollert, in the city's north.More news: Billy Vunipola Axed By Broadcaster Following Controversial Israel Folau Post
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A security guard from Love Machine said the music inside the R&B nightclub was so loud that patrons and staff inside had no idea anything was occurring outside during the shooting.
One woman posted to social media to let her family and friends know she was safe after she witnessed the shooting.
"The exact circumstances are still being established", police said.
Edie, who lives in the nearby commission flats, says she didn't hear anything overnight.
"It's scary because it's right on your doorstep - it could have happened to one of us".
Police are investigating and appealing for anyone with video footage or information to come forward.
"Australians deserve Members of Parliament and Senators who have a genuine, informed plan to get illegal guns out of our communities".