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Heavily-armed French police in bullet-proof vests and helmets have cordoned off a residential area where reportedly a French national of North African origin who declared that he was a member of the Al Qaeda network is holed up.
The man is a suspect in a series of deadly shootings, which he allegedly carried out to avenge the killing of Palestinians.
Two officers were wounded as shots rang out in the ongoing operation in a suburb a few kilometres from the Ozar Hatorah Jewish school where Monday's shootings took place, officials said.
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Authorities believe that the gunman in Monday's school shooting is the same person responsible for killing three soldiers of North African origin in two shootings last week in Toulouse and the nearby town of Montauban.
Interior Minister Claude Gueant said that the 24-year-old man had made several visits to Afghanistan and Pakistan and had said that he was acting out of revenge for France's military involvement overseas.
"He claims to be a mujahideen and to belong to the Al Qaeda," Gueant told journalists at the scene of the siege.
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Gueant said the suspect "wants to take revenge for Palestinian children" killed in the Middle East, and is angry at the French military for its operations abroad.
Authorities got the gunman's mother to try and talk to him. However, the gunman refused to surrender.
Authorities have been conducting a massive manhunt across a swath of southern France after seven people were killed in three attacks over the past several days, and France's terror alert level was raised to its highest level ever in the region.
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A French soldier was killed in Toulouse on March 11, two other troopers were killed and one injured on Thursday in the nearby town of Montauban, and three children and a rabbi were killed in a shooting at a Jewish school in Toulouse on Monday.
The suspect in the attacks drove a motorcycle, and the same weapon, a Colt 45, was used in all three shootings.
Another less powerful weapon also was used in the attack on the Jewish school.