A police officer told the BBC that two people were killed after a gunman believed to be the killer of a policewoman in Montrouge entered the supermarket near Porte de Vincennes.
Armed police have flooded the area.
In Dammartin-en-Goele, 35km (22 miles) north-east of Paris, the Charlie Hebdo suspects are also holding a hostage.
The Islamist militants are inside a small printing business and have reportedly said they are prepared to die.
Twelve people were shot dead and 11 were injured in Wednesday's attack on the office of Charlie Hebdo, a satirical magazine which freely mocks religion.
The unprecedented attack shocked France and there has been an outpouring of sympathy and solidarity worldwide.
Armed anti-terror teams have surrounded the Hypercacher supermarket on avenue de la Porte de Vincennes in eastern Paris, where a gunman is said to be holding five hostages.
He knew at least one of the suspected Charlie Hebdo attackers, brothers Cherif and Said Kouachi, a source told AFP news agency.
The gunman has threatened to kill his captives if police seek to capture the brothers, reports citing police say.
Schools near the supermarket are under lockdown.
Separately police have ordered the closure of all shops in the Marais, a traditionally Jewish area in the heart of Paris's central tourist district.
The gunman in eastern Paris is also suspected to be behind the shooting of a policewoman in the southern suburb of Montrouge on Thursday.
French police have issued an appeal for witnesses to that shooting. They said they were looking for two people: a man called Amedy Coulibaly, 32, and a woman called Hayat Boumeddiene, 26.
The two were thought to be "armed and dangerous", French police said.
The Charlie Hebdo attackers, linked by intelligence officials to militant groups, shouted Islamist slogans during the shooting at the magazine office on Wednesday and then fled Paris in a hijacked car, heading north.
Shots were fired during a high-speed car chase earlier on Friday.
It appears the suspects had hijacked another car in the town of Montagny-Sainte-Felicite before travelling on to Dammartin.
The car's owner is said to have recognised them as the Kouachi brothers.
In a televised statement, Interior Minister Bernard Cazeneuve confirmed the men being sought on Friday were those wanted for the Charlie Hebdo attack and said they would be "neutralised".
The suspects have been surrounded in a small printing business named CTD, a source close to the investigation told AFP.
Officials from the town council say pupils from three schools are being evacuated to a nearby gymnasium, where they will be reunited with their parents.
Christelle Alleume, who works near CTD in Dammartin, said a round of gunfire had interrupted her morning coffee break.
"We heard shots and we returned very fast because everyone was afraid," she told French broadcaster iTele. "We had orders to turn off the lights and not approach the windows."
People in the area say police helicopters began arriving around 08:45 (07:45 GMT) followed by convoys of armed officers. Sharpshooters could be seen taking up position on rooftops.
The security situation has affected flights at the main airport in Paris, which is in the vicinity. Officials at Paris Charles de Gaulle say they have changed landing and take-off patterns for aircraft in the light of the security situation.
It is believed the Charlie Hebdo gunmen were angered by the satirical magazine's irreverent depictions of the Prophet Muhammad.
During the attack on Charlie Hebdo, the attackers are said to have shouted "We are al-Qaeda, Yemen", an apparent reference to the al-Qaeda in the Arabian Peninsula group (AQAP).
In the US, a senior official has told reporters that one of the two brothers alleged to have carried out the attack, Said Kouachi, spent "a few months" training in Yemen with the group.
Said and his younger brother, convicted terrorist Cherif Kouachi, were on a US no-fly list before the attack, a US counter-terrorism official told the New York Times.
France's main Muslim federations have called on imams at 2,300 French mosques to "condemn the violence and the terrorism with maximum firmness".
The victims
Obituary: Defiant editor
A mosque and a kebab shop in Paris were attacked on Thursday. There were no injuries.
President Francois Hollande called for tolerance, saying France had been "struck directly in the heart of its capital, in a place where the spirit of liberty and thus of resistance breathed freely".
"Reassuring the population is telling them that they live in a state run by the rule of law and which has the will to be together, to refuse one-upmanship, stigmatisation and caricatures," he said.
The lawyer for Charlie Hebdo, Richard Malka, has said that next week's edition of the magazine will go ahead on Wednesday and will have a print run of one million instead of the normal 60,000 copies.
"It's very hard. We are all suffering, with grief, with fear, but we will do it anyway because stupidity will not win," columnist Patrick Pelloux said.
A gunman has seized hostages at a kosher supermarket in Paris as police have cornered the two Charlie Hebdo massacre suspects further north.