Three police were reported injured, one of them seriously.
Merah, who earlier said he wanted to die with his arms in his hand, appears to have fired on them as they made their way through his flat.
A long exchange of fire rang out in the quite Toulouse neighbourhood where Merah has been besieged by police at 11.20 Thursday morning.
After having heard nothing from Merah for several hours, police told the AFP news agency that they had entered the flat at about 11 am but were moving slowly through it.
Although gunfire had been heard at about 1.00 am, Merah had shown no sign of life when three explosions shook the area after break of day, leading Interior Minister Claude Guéant to say that he hoped he was still alive.
There was silence for several minutes after police entered the flat but later gunfire echoed through the quiet streets.
At shortly after 11.30am, a police source told newswires that he had died.