The man has claimed to be linked to Al Qaeda and to have acted to avenge Palestinian children killed by Israel.
Police from the elite Raid unit started the siege at about 3.00 am Wednesday and two have been lightly wounded in exchanges of fire.
They hope to take him alive and he has told police that he will surrender during the afternoon, according to Interior Minister Claude Guéant.
"The presumed guilty party asked for a means to communicate with police. In exchange for this means of communication, he threw a Colt .45 from the window.
He has certainly thrown one weapon out, but he has others," he said.
Earlier his mother was brought to the scene but refused to speak to him, saying that she had no influence over him. She has since been detained by police.
His brother has been arrested after his IP address was apparently used to arrange a meeting with one of the victims.
The suspect, who is on the first floor of a block of flats in Toulouse, is reported to have told police that he is a “mujaheddin” (Islamic fighter) and is connected to Al Qaeda.
According to Guéant, he has visited Afghanistan and Pakistan and to have been arrested in the Afghan city of Kandahar, the traditional base of the rebel Taliban movement.
Senior producer Ebba Kalondo at RFI’s sister TV station, France 24, received a call from a man claiming to be the killer that is being taken seriously by police.
He told her that he was linked to Al Qaeda and that he had filmed his crimes and would soon post the footage on the web.
French Muslim leaders have appealed to the population not to stigmatise their community, "99 per cent" of whom are law-abiding citizens, according to Paris Grand Mosque Rector Dalil Boubakeur.