The hostage drama unfolded at a printing business in the small town of Dammartin-en-Goele, only 12 kilometres (seven miles) from Paris's main Charles de Gaulle airport, police sources said. (Charlie Hebdo Suspects Holed Up in Building Near Paris Airport: 10 Developments)
Interior Minister Bernard Cazeneuve confirmed that an operation was under way to "neutralise" the suspects as the massive manhunt appeared to be reaching a dramatic climax with helicopters buzzing overhead.
Prior to the standoff, the suspects had hijacked a Peugeot 206 nearby from a woman who said she recognised them as the brothers, Cherif and Said Kouachi, accused of killing 12 people in Wednesday's attack on the satirical weekly Charlie Hebdo, which repeatedly lampooned the Prophet Mohammed.
The attack was France's deadliest bloodbath in half a century.
Prosecutors told AFP there had been no casualties in the shoot-out.
The frantic search for the pair came as it emerged they had been on a US terror watch list "for years".
And as fears spread in the wake of the attack, the head of Britain's domestic spy agency MI5 warned that Islamist militants were planning other "mass casualty attacks against the West" and that intelligence services may be powerless to stop them.
Wednesday's bloodbath at the satirical magazine Charlie Hebdo in Paris has sparked a global chorus of outrage, with impromptu and poignant rallies around the world in support of press freedom under the banner "jesuischarlie" (I am Charlie).
US President Barack Obama was the latest to sign a book of condolence in Washington with the message "Vive la France!" as thousands gathered in Paris on a day of national mourning Thursday, and the Eiffel Tower dimmed its lights to honour the dead.
And as a politically divided and crisis-hit France sought to pull together in the wake of the tragedy, the head of the country's Muslim community - the largest in Europe - urged imams to condemn terrorism at Friday prayers.
In a highly unusual step, President Francois Hollande was due to meet far-right leader Marine Le Pen at the Elysee Palace later Friday, as France geared up for a "Republican march" on Sunday expected to draw hundreds of thousands.
- 'Dressed like Robocops' -
French authorities raised the security alert to the highest possible level in the region of Picardy, to the northeast of Paris, as forces tightened their noose on the brothers, Cherif Kouachi, 32 and Said, 34.
Around 24 hours into the manhunt, the brothers were identified after holding up a petrol station 80 kilometres (50 miles) from Paris.
Helicopters buzzed overhead during the night and paramilitary forces were preparing to step up their house-to-house searches.
As heavily armed crack units swarmed through the normally tranquil countryside villages, residents voiced their nervousness. (France Deploys Elite Forces in Hunt for Massacre Suspects)
French Interior Minister Bernard Cazeneuve announced that a total of 88,000 security forces were mobilised across the country and that an international meeting on terrorism would take place in Paris on Sunday.
Nine people had already been detained as part of the operation, Cazeneuve said.
And in an uneasy French capital, isolated incidents on Thursday ratcheted the tension higher, and the shooter of a policewoman, apparently unrelated to the Charlie Hebdo attacks, was still on the run.
Hollande convened key ministers for a third emergency meeting at the Elysee Palace.
- Stupidity will not win -
Meanwhile, questions mounted as to how a pair well-known for jihadist views could have slipped through the net and attack Charlie Hebdo, apparently in revenge for the weekly's repeated publication of cartoons mocking the Prophet Mohammed.
Cherif Kouachi was a known jihadist convicted in 2008 for involvement in a network sending fighters to Iraq.
Said, his brother, has been "formally identified" as the main attacker in Wednesday's bloodbath. (Said Kouachi, Suspect in Paris Killings, is Said to Have Al Qaeda Training) Both brothers were born in Paris to Algerian parents.
A senior US administration official told AFP that one of the two brothers was believed to have trained with Al-Qaeda in Yemen, while another source said that the pair had been on a US terror watch list "for years". (Read more...)
The brothers were both flagged in a US database as terror suspects, and also on the no-fly list, meaning they were barred from flying into the United States, the officials said.
The Islamic State group's radio praised them as "heroes" and Somalia's Shebab militants, Al-Qaeda's main affiliate in Africa, praised the massacre as a "heroic" act.
In chilling testimony, one witness said a masked gunman burst into the Charlie Hebdo editorial meeting screaming "Allahu akbar" ("God is greatest"), called out "Charb!", the name of famous cartoonist Stephane Charbonnier, and fired off a hail of bullets at random.
"By chance I threw myself behind the table and he didn't see me ... a few seconds, and everyone was on the ground," said journalist Laurent Leger.
Refusing to be cowed, the controversial magazine plans a print run of one million copies instead of its usual 60,000, as journalists from all over the French media landscape piled in to help out the decimated staff.
"It's very hard. We are all suffering, with grief, with fear, but we will do it anyway because stupidity will not win," said columnist Patrick Pelloux.
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