A man reported to be a serving soldier is dead and two people have been shot in Woolwich, south east London, after what Sky sources understand is being treated as a terrorist attack.
Downing Street has called a meeting of the Government's Cobra emergency committee after the incident in John Wilson Street, which David Cameron described as "truly shocking".
Sky sources understand that senior police officers believe the killing was likely to be a politically-motivated Islamist terrorist attack.
Dozens of weapons - including a number of knives - and pools of blood could be seen on the ground, where a man wearing a Help for Heroes T-shirt is said to have been attacked by two men.
An aerial shot of the scene
Witnesses say the pair appeared to deliberately drive their car at the victim, before getting out with various bladed weapons and launching their attack.
Sky sources say that following their attack, as the victim lay motionless in the middle of the road, witnesses heard the pair chanting "Allahu akbar" - and asking passers-by to take photographs of them.
Armed officers arrived at the scene and opened fire on the two alleged attackers. The men were taken to separate hospitals with gunshot wounds.
The Metropolitan Police confirmed one person had died following the incident and said the Independent Police Complaints Commission had now taken over the investigation.
Photographs taken at the scene show three people lying on the ground. Their condition was not clear. A car that appeared to have crashed could also be seen.
Commander Simon Letchford, from the Met, said officers were called to the road at 2.20pm.
"One man was being assaulted by two other men," he said.
"A number of weapons were reportedly being used in the attack, and this included reports of a firearm.
"Officers including local Greenwich officers arrived at the scene and shortly after firearms officers arrived on the scene.
"On their arrival at the scene they found a man, who was later pronounced dead. At this early stage I am unable to provide any further information about the man who has died.
"Two men, who we believe from early reports to have been carrying weapons, were shot by police. They were taken to separate London hospitals, they are receiving treatment for their injuries."
The Prime Minister is expected to cut short a trip to Paris to return to London in the wake of the incident.
Nigel Foran, who saw the incident as he returned home from shopping, described a scene of a confusion.
He told Sky News: "We saw a man running towards the police officers and then we heard a couple of gunshots.
"He went to the floor and was surrounded while officers drew their stun guns. After that, all the people who were watching ran away when they heard the gunshots."
The Ministry of Defence said it was urgently looking at the reports that the incident involved a soldier.
Greenwich and Woolwich MP Nick Raynsford had earlier told Sky News he believed the deceased was a serving soldier.
He said he had spoken to both borough commander Richard Wood and Lieutenant Colonel Bob Christopher at Royal Artillery Barracks - which is around a mile from the scene of the attack.
"We think a serving soldier was the victim. We don't know the circumstances surrounding the incident."
Schools in the area have been placed on lockdown.
Mayor of London Boris Johnson posted on his Twitter account: "This afternoon's attack in Woolwich is a sickening deluded and unforgivable act of violence."