Homicide detectives are investigating the alleged altercation at Barwon Health's Swanston Centre, on the corner of Myers and Swanston streets in Geelong, about 2am on Monday.
Police discovered the body of a man, who is yet to be formally identified, inside a room at the facility.
Another man, who was known to the victim and also a patient at the hospital, is under police guard.
The Swanston Centre, run by Barwon Health, provides intensive mental health care to adult patients, with staff including peer workers, psychiatrists, mental health nurses, social workers and occupational therapists.
The health service has a history of controversy dating back a decade.
Natasha Ablett, the older sister of AFL great Gary Ablett Jr and daughter of Gary Ablett Sr, was a patient at the hospital when she absconded in 2017.
Ms Ablett, who battled with drug addiction and had a mental health condition, died of a drug overdose.
Barwon Heath pledged to make changes at the facility following the incident, requiring staff to have swipe cards to control the front door, The Age reported at the time.
In 2021, 44-year-old Allison Naomi Eagle was found unresponsive in her bed at the Swanston Centre on the morning she was due to be discharged.
Despite concerns from family members regarding their daughter's treatment at the centre, a coroner was unable to determine the exact cause of Ms Eagle's death, but was satisfied Barwon Health had acted appropriately.
Another patient, a 54-year-old woman, was found dead at the centre in 2024, with the death treated as non-suspicious.
A coronial inquest was launched after the woman was discovered unresponsive by staff at the centre.
Months later, 22-year-old Bellamy Nieto was found dead in the facility just days after attempting to take their own life.
Barwon Health was charged in 2025 after a patient took her own life while undergoing treatment at the centre in December 2022.
The service faces two charges of failing to ensure, so far as reasonably practicable, people other than employees were not exposed to health and safety risks, WorkSafe confirmed.
The case remains before the court.
Barwon Health chief medical officer Ajai Verma confirmed the latest incident on Monday.
"There was an unexpected death of an inpatient in the acute mental health ward (Swanston Centre) overnight," Professor Verma said in a statement.
"We extend our condolences to the family of the deceased patient. Support has been extended to staff."
Health Minister Mary-Anne Thomas said the incident was "very distressing".
"Well, obviously what happened is very distressing, but it is an active police investigation and I'm not going to cut across that," she said.
"A crime scene has been established and it's important that police are able to get on and do their job."
Discussions about security in Australian hospitals and inpatient facilities have been heightened in the past month.
It comes after two people recently escaped from care in Sydney and allegedly caused the deaths of three people within 24 hours.
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