UPDATE, 5.20pm: POLICE have arrested a 35-year-old Mullumbimby man over last night's incident outside the Milk and Honey restaurant.
Inspector Greg Jago from Tweed-Byron Local Area Command said the man was charged with a number of charges including possession of knives in public and Skye's Law - failing to stop during police pursuit.
Police attempted to pursue the man after the incident but called off the chase when it became dangerous.
Inspector Jago confirmed the man was known to police.
He was refused bail and will be appearing in Tweed Local Court tomorrow morning.
ORIGINAL STORY: DINERS at a popular restaurant in Mullumbimby fled in terror last night as a man allegedly waved a knife on the footpath outside, "eyeballing" them and making threatening gestures.
A witness said the man stopped a large black van with tinted windows on the roundabout outside the crowded Milk and Honey pizza restaurant and emerged with the weapon.
He also allegedly produced a spear and a hatchet.
Timmy Brebner, owner of the restaurant, said the incident was terrifying for his customers and young staff.
He said many of the alfresco diners ran away in fear.
The man reportedly struck his vehicle with the blade and chased cars driving past, another witness said, and the incident continued for 45 minutes while the restaurant waited for police to arrive.
Management at the restaurant brought remaining customers inside and it "went into lockdown".
"We kept cooking and serving people, trying to ignore him," Mr Brebner said.
Diners watched from inside before he drove off. Police officers pursued him as he drove towards Byron Bay.
The man, in his 30s, with a shaven head and facial tattoos was arrested and is being held in a mental health unit at Tweed Hospital.
It is understood the man is known to Byron Bay police.
"I'm just grateful no one was hurt," Mr Brebner said.