Champs Elysees attacker was on watchlist

Paris prosecutor's counter-terrorism unit has opened an investigation into the driver who rammed a car a car into a police van on the Champs-Elysees.

A man has rammed a car carrying weapons and explosives into a police van at Champs Elysees avenue. (AAP)

A man who rammed a car into a police van in Paris stored a cache of weapons at his home and held a gun permit despite being on a secret service list of people linked to radical Islam, police sources and French officials say.

A judicial source said investigators were compiling an inventory of the arms and equipment found in the 31-year-old's home. The man, who died in Monday's attack, was also carrying in his car an assault rifle, two pistols, ammunition and two large gas canisters when he rammed a police convoy on Monday.

Prime Minister Edouard Philippe said the individual first received a permit to possess a gun before he was flagged to intelligence agencies as a potential militant threat. At the time there was no reason to deny him the permit, Philippe said.

He said it was "quite possible" the licence was active at the time the attacker was on a security watchlist. Three sources close to the investigation confirmed it was.

"Nobody can be happy, and certainly not me, that someone who has been flagged to security agencies can continue to benefit from such an authorisation," Philippe told BFM TV.

The man was placed on France's so called 'Fiche S' watchlist after he was found to belong to a radical Islamist movement, two police sources said.

Individuals on the list are placed under surveillance though the intensity of that surveillance varies depending on the perceived threat the individual poses.

On Monday, witnesses saw the man being pulled from the car as thick yellow smoke poured out.

Police arrested four of his close relatives in a raid south of Paris late on Monday, a police source said. They included his father and brother.

France has been on high alert after a wave of militant Islamist attacks over the past two years, including most recently an attack on police outside the Notre Dame Cathedral and an Islamic State-claimed attack on police on the Champs Elysees in April.

In July last year, 86 people were killed when a truck ploughed through a crowd in Nice, and similar incidents have occurred in other European cities.

Philippe said the government would be presenting a draft law soon to toughen counter-terrorism legislation.