Earlier, police had chased a vehicle at high speed along a main road heading towards Paris as one of France's biggest security operations in recent times unfolded. Gunshots rang out and the suspects abandoned their car in Dammartin-en-Goele, a small town of about 8,000 residents.
Police trucks, ambulances and armoured vehicles descended on the area close to Paris's Charles de Gaulle airport after the suspects took refuge with at least one hostage in a building on an industrial estate, according to police sources.
Police quickly blocked all entrances to the town seeking to limit the scale of any siege and confine the suspects, French-born sons of Algerian-born parents. Residents were asked to stay off the streets.
"All residents are requested to remain at home. Children are to be kept safe in school," the municipal website said.
The two suspects have been on the run since they stormed the Paris offices of the Charlie Hebdo weekly newspaper on Wednesday, killing ten journalists and two police officers in an attack that raised security fears across the world. The journal was known for its irreverent satirical treatment of Islam as well as other religions and political leaders.
Yves Albarello, local MP for the Seine-et-Marne department and member of the crisis cell put in place by authorities, told iTELE the two suspects had let it be known that they wanted to die "as martyrs".
Interior Ministry spokesman Pierre-Henry Brandet told iTELE television: "We are almost certain it is those two individuals holed up in that building."
Separately, a police source told Reuters that the man who killed a policewoman in a southern suburb of Paris on Thursday and fled the scene was a member of the same Islamist group as the two suspects in the Charlie Hebdo shooting.
The source said the three men were all members of the same Paris cell that a decade ago sent young French volunteers to Iraq to fight U.S. forces. Cherif Kouachi served 18 months in prison for his role in the group.
Western security services had been keen to trace any links between the two suspects and militants overseas. A senior Yemeni intelligence source told Reuters one of the two was in Yemen for several months in 2011 for religious studies.
The danger of hostage taking or of a second attack has been a central concern of security services since the attack that has rocked France and raised questions about policing, militancy, religion and censorship.
World leaders described Wednesday's attack on Charlie Hebdo as an assault on democracy; but al Qaeda's North Africa branch praised the gunmen as "knight(s) of truth".
Yohann Bardoux, a plumber whose office is two doors down from the printing shop where the hostage-taking was playing out stayed away from work after hearing gunfire. But he said his mother was in the building next door to the printing shop.
"Of course I'm worried about her, I hope it all comes down soon, and turns out well," Bardoux said.
"They are everywhere. It's really jumping. They've blocked the whole zone, we've got helicopters overhead, the police presence is impressive."
A spokesman for Charles-de-Gaulle airport said all its runways were open but that landings were only taking place at the two south terminals.
A senior Yemeni intelligence source told Reuters one of the two suspects was in Yemen for several months in 2011 for religious studies; but there was no confirmed information whether he was trained by Al Qaeda in the Arabian Peninsula (AQAP).
The gunmen shouted "Allahu Akbar" (God is greatest) as they carried out the attack, which has been described by President Francois Hollande and other world leaders as an attack on the fundamentals of democracy.
The attack has raised fears in other capitals of similar actions. Western leaders have long feared Islamist militants drawn into fighting in Iraq, Syria, Yemen and elsewhere could launch attacks in their home countries on their return.
London suffered an assault on its transport system in 2005, four years after the 9/11 attacks in the United States. More recent attacks have been carried out by militants in countries including India, Pakistan, Nigeria and Kenya.
The fugitive suspects are both in their early 30s, and were already under police surveillance. One was jailed for 18 months for trying to travel to Iraq a decade ago to fight as part of an Islamist cell. Police said they were "armed and dangerous".
U.S. and European sources close to the investigation said on Thursday that one of the brothers, Said Kouachi, was in Yemen in 2011 for several months training with AQAP, one of the group's most active affiliates.
A Yemeni official familiar with the matter said the Yemen government was aware of the possibility of a connection between Said Kouachi and AQAP, and was looking into any possible links.
U.S. government sources said Said Kouachi and his brother Cherif Kouachi were listed in two U.S. security databases, a highly classified database containing information on 1.2 million possible counter-terrorism suspects, called TIDE, and the much smaller "no fly" list maintained by the Terrorist Screening Center, an inter-agency unit.
U.S. television network ABC reported that the brothers had been listed in the databases for "years".
Amid local media reports of isolated incidents of violence directed at Muslims in France, Hollande and his Socialist government have called on the French not to blame the Islamic faith for the Charlie Hebdo killings.
Hollande has held talks with opposition leaders and, in a rare move, invited Marine Le Pen, leader of the resurgent anti-immigrant National Front, to his Elysee Palace for discussions on Friday.
QUESTIONS OVER POLICING
French people held a national day of mourning on Thursday. The bells of Notre Dame pealed for those killed in the attack on the left-leaning slayer of sacred cows whose cartoonists have been national figures since the Parisian counter-cultural heyday of the 1960s and 1970s.
Many European newspapers either re-published Charlie Hebdo cartoons or lampooned the killers with images of their own.
The younger brother's jail sentence for trying to fight in Iraq a decade ago, and more recent tangles with the authorities over suspected involvement in militant plots, raised questions over whether police could have done more to watch them.
Cherif Kouachi was arrested on Jan. 25, 2005 preparing to fly to Syria en route to Iraq. He served 18 months of a three-year sentence.
"He was part of a group of young people who were a little lost, confused, not really fanatics in the proper sense of the word," lawyer Vincent Ollivier, who represented Cherif in the case, told Liberation daily.
In 2010 he was suspected of being part of a group that tried to break from prison Smain Ali Belkacem, a militant jailed for the 1995 bombings of Paris train and metro stations that killed eight people and wounded 120. The case against Cherif Kouachi was dismissed for lack of evidence.