Two French policemen were reportedly injured in a shoot-out when they targeted the suspects in the Toulouse school shooting during a pre-dawn raid on a house on Wednesday.
A 24-year-old man is believed to be holed up inside the bungalow and defending himself where the operation is taking place.
French Interior Minister Claude Gueant told reporters that the man inside the bungalow where the operation is taking place has claimed affiliation to al-Qaeda.
The investigators have brought the suspect's mother to the scene to negotiate with him and his brother is already under arrest, the BBC has reported quoting the minister.
The suspect wanted to avenge the Palestinian children and denounced the French crimes in Afghanistan, Gueant told a French TV channel.
The raid is said to be still going on and the French police have cordoned off the residential area of Toulouse.
A police source told Reuters that the raid began at 3.00 am local time (0200 GMT) and was ongoing, but did not provide further details.
Meanwhile the bodies of victims including 30-year-old Rabbi Jonathan Sandler, his sons Arieh, 5, and Gabriel, 4, and seven-year-old Miriam Monsonego were flown to Israel.
Their funeral will take place in the coming hours in Jerusalem. Thousands of people are expected to attend the funeral services, reported the BBC.