Sydney stallholder's elderly customer shot

A stallholder at Hornsby farmer's market says he was selling bread to an elderly woman when she started screaming and said, "I've been shot," as police fired at a psychiatric patient.

Steve Middleton, who runs the Brasserie Bread stall, saw a male and female police officer running toward the knife-wielding man just before noon on Thursday.

Several shots were fired when the man ran at them, he said.

Mr Middleton said the elderly woman was hit by a bullet he believed bounced off a fountain in the pedestrian part of Hornsby's Florence St, where the markets were held.

"I was standing there with the lady, she started to scream," Mr Middleton told AAP.

"Then she says, `I've been shot'. When I looked down there's certainly blood coming out from underneath her, dark red blood, but then some lighter really thick blood."

Mr Middleton believes a bullet from the female officer's gun hit the woman, whose name he said was Anne-Marie.

"(It's) hit the fountain, bounced off, flown over and hit her.

"They (the officers) weren't facing the guns at us at all."

Mr Middleton said the attacker didn't say anything but was waving a large knife at the officers.

"He just had a little smile on his face, no shoes, tracksuit pants, baggy jumper."