France: 1 decapitated, many hurt in suspected Islamist attack

"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 source close to the enquiry.

"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 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. He described the assault as a "terrorist attack".

"The intent was without doubt to cause an explosion. It was a terrorist attack," Hollande told reporters.

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 <g data-gr-id="37">alone,</g> or had accomplices.

The 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.

Meanwhile, Interior Minister Bernard Cazeneuve said he would go "immediately" to the scene, his office said.

Prime Minister Manuel Valls, who is on an official trip in South America, ordered increased security measures at all sensitive sites in the area.

Anti-terrorist prosecutors immediately took up the case.

The attack occurred around 10:00 am local time (0800 GMT), according to local media, in the small town of Saint-Quentin-Fallavier, around 40 kilometres from Lyon, France's second city.

France has been on high alert since January 7 when two Islamist brothers attacked Charlie Hebdo, killing 12. A policewoman and four hostages in a Jewish supermarket were also killed during the three-day attacks.