France has raised its security threat level to the highest level after at least three people were killed and 12 more wounded in a shooting near a Christmas market in Strasbourg.

“There were gunshots and people running everywhere,” one local shopkeeper told BFM TV on Wednesday morning.

“It lasted about 10 minutes.”

Amid fast-moving, confusing scenes it was initially unclear if the suspect, identified by police as Strasbourg-born Chekatt Cherif, 29, had been captured.

A source close to the operation said Mr Cherif had been cornered and shots had been fired. But an hour or so later, a police source said he was still on the run.

“He fought twice with our security forces,” Interior Minister Christophe Castaner told the BBC.

Early on Wednesday (French time), Mr Castaner said the national Vigipirate level had been raised from “Heightened Security” to “Attack Emergency”.

The government’s official website says an Attack Emergency can be declared in the event of an imminent threat of a terrorist act or directly after an attack.

The declaration allows “exceptional measures” to be taken to prevent an attack. Mr Castaner said the move would help security forces to bolster security for Christmas markets across the country.

#Strasbourg: Police tell residents to stay indoors while responding to gunfire pic.twitter.com/nHWs7EkGA5

— Bloomberg Originals (@bbgoriginals) December 12, 2018

The attack began about 8pm local time (6am AEDT) on Tuesday, as stallholders prepared to close and the city’s restaurants filled up. Bystanders were swiftly ushered into nearby shops.

The European Parliament, which is sitting in Strasbourg this week, was put into lockdown.

Strasbourg is on the west bank of the Rhine River. On the opposite side, German police tightened border controls, officials said.

Mr Castaner said the gunman was known to security services, and the local prefecture said he was on an intelligence services watchlist.

A Reuters reporter was among 30 to 40 people being held in the basement of a supermarket for their own safety, waiting for police to clear the area. Lights were switched off and bottles of water handed out.

A source at the prosecutor’s office said the motive behind the shooting was not immediately clear.

The US-based Site intelligence group, which monitors jihadist websites, said Islamic State supporters were celebrating.

Sources familiar with the police operation said Mr Cherif’s home had been raided earlier in the day in connection with a robbery during the summer. He was not there.

France remains on high alert after a wave of attacks commissioned or inspired by Islamic State militants since early 2015, in which about 240 people have been killed.

The Strasbourg Christmas markets are well known throughout Europe and are a popular destination for tourists.

The market was held amid tight security this year. Unauthorised vehicles were banned from surrounding streets during opening hours and checkpoints set up on bridges and access points to search pedestrians’ bags.

President Emmanuel Macron was informed of the shooting and was being updated as events unfurled, an Elysee Palace official said.

French Ecology Minister Francois de Rugy tweeted: “Solidarity and support for the people of Strasbourg. Our support too for the security forces. We are united and determined to protect the French people.”

Almost exactly two years ago, a Tunisian Islamist rammed a hijacked truck into a Christmas market in central Berlin, killing 11 people as well as the driver.

In 2016, a truck ploughed into a Bastille Day crowd in Nice, killing more than 80, while in November 2015, co-ordinated attacks on the Bataclan concert hall and other sites in Paris claimed about 130 lives.

-with AAP