Police have been arriving at the Toulouse block of flats in huge numbers
France's interior minister has denied reports that security forces have arrested the main suspect in the recent spate of shootings around Toulouse.
Claude Gueant said negotiations were continuing with the suspect, named as Mohammed Merah, 23, a Frenchman of Algerian origin.
BFM TV earlier reported that Merah had been detained inside a block of flats that has been surrounded by police.
He is suspected of killing three soldiers and four Jewish people.
The killings took place in and around Toulouse in three separate incidents earlier this month.
On 11 March, a soldier was shot and killed after replying to an advertisement offering a motorcycle for sale.
Days later, two soldiers were shot and killed and a third was wounded while waiting for money from a cash machine.
And earlier this week, three children and an adult were shot and killed outside a Jewish school.
'Vengeance' claimPolice surrounded Merah's block of flats after two officers were shot at when they tried to get into his flat.
Officials say he is heavily armed with a Kalashnikov high-velocity rifle, a mini-Uzi 9mm machine pistol, several handguns and possibly grenades.
The five-story block of flats was evacuated earlier, and police were also moving residents of nearby buildings.
Elsewhere in the city, police are hunting for accomplices and have detained several members of his family.
His mother was taken to the scene in the hope that she could persuade him to surrender, but she told police that she had no influence over her son.
Negotiators have been talking to Merah all morning, but Mr Gueant, who is at the scene, said he appeared to have no particular demands.
The suspect has said he belonged to al-Qaeda and acted to "avenge Palestinian children".
He had apparently spent time in Pakistan and Afghanistan, where he was jailed for three years for planting bombs.
The prison director in Kandahar, southern Afghanistan, Gulam Farooq, told the BBC that Merah was arrested in 2007, but escaped in a Taliban-led break-out in 2008.
President Nicolas Sarkozy has arrived in Toulouse and is expected to speak to the media shortly.
In an earlier televised address, he paid tribute to the security forces who are carrying out the operation and said terrorism "will never be able to fracture our national community".
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