Roads have been blocked off around Rue de la Republique in Saint Denis, in the same district as the Stade de France, where suicide attackers detonated bombs on Friday.
Truckloads of soldiers joined armed police at the scene.
"I've been hearing gunshots continuously, like fireworks... There have been some breaks but... to me it sounds like continuous gunshots," one resident, Benson Hoi, told the BBC. Image copyrightReutersImage caption Armed police sealed off the area as shots rang out in Saint Denis Image copyrightReutersImage caption Some residents in Saint Denis were evacuated Another witness, Amine Guizani, told the Associated Press he heard the sounds of grenades and automatic gunfire.
"They were shooting for an hour, non-stop. There were grenades. It was going, stopping, Kalashnikovs, Starting again," he said.
At least five people were believed to have been in the targeted third floor flat in Rue de La Republique, French radio RTL reported.
Several police officers had been wounded.
The operation began at around 04:30 local time (03:30 GMT). Deputy Mayor Stephane Peu urged local residents to stay indoors, saying "it is not a new attack but a police intervention".
Media captionPolice now suspect there may be nine attackers in totalBelgian Abdelhamid Abaaoud, 27, had been thought to have organised Friday's attacks from Syria, but is now believed to have been one of those in the St Denis apartment.
Earlier, security sources said surveillance video showed a possible ninth assailant during Friday's attacks.
The video reportedly shows a third figure in the car carrying the group which attacked several bars and restaurants.
It is not clear if this ninth attacker is one of two suspected accomplices detained in Belgium or is someone still on the run.
Special report: In-depth coverage of the attacks and their aftermath The near simultaneous attacks on bars and restaurants, a concert hall and the Stade du France left more than 400 people wounded, with 221 still in hospital, 57 of them in intensive care.
European countries are on high alert. On Tuesday evening, a football friendly between Germany and the Netherlands was cancelled shortly before kick-off and the stadium in Hanover evacuated after "concrete" information about a bomb threat, according to the city's police chief.
Part of Hanover railway station was also closed while a suspicious object was investigated.
Meanwhile, two Air France planes heading to Paris from the US were diverted because of security threats. One was sent to Halifax in Canada, the other flew to Salt Lake City in the US state of Utah. Both planes landed safely and the passengers were unharmed. Paris tributes after the attacks - 360-degree video
What is Islamic State?
IS is a notoriously violent Islamist group which controls large parts of Syria and Iraq. It has declared its territory a caliphate - a state governed in accordance with Islamic law - under its leader Abu Bakr al-Baghdadi.
What does it want?
IS demands allegiance from all Muslims, rejects national borders and seeks to expand its territory. It follows its own extreme version of Sunni Islam and regards non-believers as deserving of death.
How strong is IS?
IS projects a powerful image, partly through propaganda and sheer brutality, and is the world's richest insurgent group. It has about 30,000 fighters but is facing daily bombing by a US-led multi-national coalition, which has vowed to destroy it. What is Islamic State? Are you in the area? Have you been affected by what has been happening? Do you have any information you can share? If it is safe to do so, you can get in touch by emailing haveyoursay@bbc.co.uk
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