A suspected Islamist attacker has pinned a decapitated head covered with Arabic writing to the gates of a gas factory in eastern France before being arrested, police say.
The suspect entered the factory on Friday and set off several small explosive devices, the source said.
The suspect arrested for a French Islamist attack did not have a criminal record but had been under watch as being possibly radicalised, Interior Minister Bernard Cazeneuve said on Friday.
"This person was the subject of an "S" ("security") file for radicalisation in 2006, which wasn't renewed in 2008. He didn't have a criminal record," Cazeneuve told journalists at the scene of the attack. He added that police had detained other possible accomplices.
Police said it was unclear whether the attacker was acting alone, or had accomplices.
"According to the initial findings of the enquiry, one or several individuals on board a vehicle, drove into the factory. An explosion then took place," said one of the sources.
Emergency personnel work at the scene of a suspected Islamist attack, outside the Air Products factory in Saint-Quentin-Fallavier, southern France, 26 June 2015. (EPA) Source: EPA
"The decapitated body of a person was found nearby the factory but we do not yet know whether the body was transported to the place or not," added this source, adding that a "flag with Arabic writing on it was found at the scene."
French President Francois Hollande, in Brussels for a summit of EU leaders, rushed back to France to deal with the crisis.
The killing came nearly six months after the Islamist attacks in and around Paris that killed 17 people in January, starting with a shooting at satirical magazine Charlie Hebdo.
One suspect entered the factory owned by American group Air Products and set off several small explosive devices, sources close to the investigation said, with several people hurt in the assault.
Police said it was unclear whether the attacker was acting alone, or had accomplices.
A man thought to be the person who carried out the attack has been arrested, according to sources close to the enquiry, who said he was known to the security services.
"We cannot say anything reliable yet about the identity of the person arrested who is refusing to speak and did not have any identity papers," said a legal source.
Interior Minister Bernard Cazeneuve said he would go "immediately" to the scene, his office said.
Prime Minister Manuel Valls ordered increased security measures at all sensitive sites in the area.
Anti-terrorist prosecutors immediately took up the case.
Emergency personnel work at the scene of a suspected Islamist attack, outside the Air Products factory in Saint-Quentin-Fallavier, southern France, 26 June 2015. (EPA) Source: EPA
The attack occurred around 10am local time (1700 AEST), according to local media, in the small town of Saint-Quentin-Fallavier, around 40 kilometres from Lyon, France's second city.
"This is a small town and a large industrial zone. There's never been any concern in the region. We're all surprised. We're really in shock this morning," an employee at a nearby business told rolling news channel BMFTV.
Bishop says attack appears to be a 'terror attack'
The attack on a French factory appears to be a terrorist attack, Foreign Minister Julie Bishop says.
"If the early reports are true, this is another horrific reminder of the brutality of these terrorist organisations that are attacking civilians in a most violent and barbaric way," Ms Bishop told reporters in Melbourne.
A suspected Islamist attacker has pinned a decapitated head covered in Arabic writing to the gates of a gas factory in eastern France.
Ms Bishop said the early reports appeared to be correct and indicate that it was a terrorist attack.
"There is an indication that a black flag with Arabic writing was found near the scene and that there was a decapitated head," she said.
"That would be consistent with other terrorist attacks that we've seen in recent times.
"It is a grim reminder of the horrific nature of these terrorist attacks and we must be ever vigilant to ensure that this doesn't happen in Australia."
Almost six months after Charlie Hedbo attack
The attack came nearly six months after the Islamist attacks in and around Paris that killed 17 people in January that started with a shooting at satirical magazine Charlie Hebdo.
Two Islamist brothers attacked the satirical magazine, killing 12. A policewoman and four hostages in a Jewish supermarket were also killed during the three-day attacks.
The January attacks drew record crowds onto the streets of Paris in a historic "march against terrorism".
Nearly four million people marched through the streets of France and more than 1.5 million in the French capital along with dozens of world leaders to express defiance in the wake of the attacks.
France has a high proportion of people that have gone to fight alongside Islamists in Iraq and Syria and has been on alert for possible attacks on its soil since the Charlie Hebdo attacks.
Earlier this week, the country passed a controversial new spying law granting sweeping powers to snoop on citizens.
The new French law allows authorities to spy on the digital and mobile communications of anyone linked to a "terrorist" inquiry without prior authorisation from a judge, and forces internet service providers and phone companies to give up data upon request.
Intelligence services will have the right to place cameras and recording devices in private dwellings and install "keylogger" devices that record every key stroke on a targeted computer in real time.
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