A street in the French captial has been closed off as police cordon the area.
"The individual has been arrested and the hostages are out of danger", Interior Minister Gerard Collomb said on Twitter.
Shocking photos show police decked out in body armour with a local reporter warning of "an armed man". "The negotiator had difficulty understanding". At this time, police do not now believe the situation is terror-related.More news: Spain boss Lopetegui to take Real reins after World Cup
More than a dozen heavily-armed police officers, firefighters and rescue workers were stationed outside the building where the hostages were being held, located in a crowded neighbourhood in the centre of the French capital.
The Paris prosecutor's office detained the suspect, a 26-year-old man born in Morocco, a judicial official said.
Authorities provided no details of the raid by specially trained intervention police officers four hours after the hostage-taking began at about 4 p.m. The suspect reportedly doused two of the hostages with gasoline after the one managed to escape.
According to media reports, three people were taken hostage, including a pregnant woman.