The Frenchman suspected of a spate of shootings in the Toulouse area planned more killings, prosecutors have said.
Anti-terror chief Francois Molins said the suspect, named as Mohammed Merah, 23, of Algerian descent, intended to kill a soldier and two police officers.
Merah, who says he was trained by al-Qaeda, is suspected of murdering three soldiers and four Jewish people.
Police have surrounded his flat and are trying to persuade him to surrender. He is said to be heavily armed.
Earlier reports said he had been captured, but officials later rebuffed the claims.
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Just after President Sarkozy arrived in Toulouse for meetings at a military barracks close to where the siege is taking place, reports began circulating that it was all over, Mohammed Merah had been arrested.
But minutes later came the denials. First by local officials in Toulouse, then by the interior minister himself. It all added to the tension. How will the siege which began at 3am local time on Wednesday morning, be brought to an end?
Officially the French government says it wants to capture him alive so that he can stand trial on charges of murdering seven people and injuring at least two others.
But it will not be an easy operation if he decides to stand and fight. He is reported to have an automatic rifle, a sub machinegun and grenades inside his apartment.
At the scene
But minutes later came the denials. First by local officials in Toulouse, then by the interior minister himself. It all added to the tension. How will the siege which began at 3am local time on Wednesday morning, be brought to an end?
Officially the French government says it wants to capture him alive so that he can stand trial on charges of murdering seven people and injuring at least two others.
But it will not be an easy operation if he decides to stand and fight. He is reported to have an automatic rifle, a sub machinegun and grenades inside his apartment.
The killings took place in and around Toulouse in three separate incidents earlier this month.
On 11 March, a soldier was shot and killed while waiting to see a man about selling his motorcycle.
Days later, two soldiers were shot and killed, and a third was wounded while waiting at a cash machine.
Then earlier this week, three children and an adult were shot and killed outside a Jewish school.
The four Jewish victims were buried in an emotional funeral in Jerusalem earlier.
In a news conference, Mr Molins said Merah had planned to kill a soldier later on Wednesday and also had plans to target the police.
"If he's telling the truth, he would have left his house this morning and he would have once again killed any soldier that he came across," the prosecutor said.
Mr Molins said the suspect had expressed no regret for the killings, but had said he wanted to kill more people and "bring France to its knees".
President Nicolas Sarkozy has attended a memorial at a military base in nearby Montauban for the three murdered soldiers.
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Hunt for French killer
France has seen an unprecedented security clampdown after a lone gunman killed seven people, including three children, in three separate attacks in the south-west of the country.Police tracked down the main suspect after investigating the movements of a stolen scooter used by the killer to make his escape following shootings in Toulouse and nearby Montauban.
6 March: Scooter stolen
A Yamaha T-Max scooter that proves key to tracking down Mohammad Merah, the main suspect in the targeted killings, is stolen.Police say Merah or an associate later contacted a garage to find out how to switch off the stolen bike's GPS tracker device.
After the attacks began, inquiries were also made about how the bike could be resprayed, and suspicious garage staff contacted the police.
11 March: Gunman strikes
French soldier Imad Ibn-Ziaten is lured to a meeting in Toulouse after advertising his motorbike for sale.The suspect apparently uses his brother's email address to arrange a meeting with Sgt Ibn-Ziaten. The paratrooper, who is not in uniform, is shot dead at close range.
Police say the weapons used to kill the soldier were the same as those employed in the subsequent attacks in Montauban and Toulouse.
15 March: Double killing
Four days later, the gunman strikes again using the same weapons and riding the stolen scooter.The assassin targets paratroopers in the nearby garrison town of Montauban. Abel Chennouf (left) and Mohamed Legouade are killed as they wait by a cash machine. A third soldier is critically injured.
Police say the killer is a meticulous operator. The clip for the gun used in all three attacks has no fingerprints or DNA on it.
19 March: Jewish children killed
Another four days pass before the killer targets a Jewish school in Toulouse.Arriving on the scooter, the killer guns down Rabbi Jonathan Sandler, his two sons Gabriel (aged four) and Arieh (five), and seven-year-old Myriam Monsonego at close range.
Reports suggest the killer wore a video camera, apparently to record his actions. A crash helmet and visor hid his identity.
21 March: Suspect cornered
An email address used by the suspected killer leads the police to this apartment block in Toulouse.A raid on the apartment on the first floor is launched in the early hours of the morning. Police officers who knock on the door of an apartment are fired on - but not seriously hurt.
The heavily armed gunman gives up one of his guns in exchange for a mobile phone to speak to police. Residents in the apartment block are evacuated from the area.
The stand-off continues.
He earlier told Jewish community leaders that the gunmen had been planning more attacks before police had surrounded his apartment block.
'Vengeance' claim Police moved into Merah's block 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.
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Mohammed Merah
- French citizen of Algerian extraction, aged 23
- Has criminal record in France for non-terrorist crimes
- Has described himself as an al-Qaeda member and has spent time in Afghanistan and Pakistan
The five-storey block of flats was evacuated earlier, and police were also moving residents of nearby buildings.
Hundreds of officers are now stationed outside the block.
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 officials said he appeared to have no particular demands.
The suspect has said he acted to "avenge Palestinian children" and said he would give himself up.
Nicolas Sarkozy: "The soldiers were targeted because they were part of the French army"
Merah claimed to have received al-Qaeda training in Pakistan's Waziristan area, and also said he had been to Afghanistan, prosecutors said.
Afghan officials told the BBC he had been jailed in Kandahar for planting bombs in 2007, but escaped in a Taliban-led break-out in 2008.
Other Afghan sources cast doubt on the claims, saying the man jailed in Kandahar might have been a different person with the same name.
Mr Molins said Merah had visited Afghanistan twice.
He gave no details of the first visit, but said that during his second trip last year, Merah was captured by Afghan forces and handed to the Americans, who put him on a plane back to France.
But American officials told CNN that US forces had not dealt with Merah, and that the Afghans had handed him to French forces, who had returned him to France.
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