A man has been decapitated and several others injured at a factory in France in what President Francois Hollande has called a terrorist attack. Photo: BBC NEWS

Two men drove into the Air Products gas factory near Lyon, officials said, before several explosions were heard.

One of the suspects, who was investigated by police in 2006, has been arrested.

The dead man was found with Arabic inscriptions on him and an Islamist flag was found near the site.

At a press conference from Brussels, Mr Hollande confirmed that two attackers had targeted the chemicals factory in Saint-Quentin-Fallavier, crashing into it in a car.

"We have no doubt that the attack was to blow up the building. It bears the hallmarks of a terrorist attack," he said.

Mr Hollande said he would leave the EU summit in Brussels this afternoon and return to France.

Speaking from the scene, France's Interior Minister Bernard Cazeneuve said the suspect in custody has been under investigation between 2006 and 2008.

Mr Cazeneuve said the identity of the suspect was yet to be confirmed but that he was thought to be Yacine Sali.

"This person was under investigation for radicalisation but this investigation was not renewed in 2008. He had no police record," Mr Cazeneuve said.

Officials said the suspect in custody has been known to police since 2006

According to France's Dauphine Libere newspaper, a second suspect has been arrested at his home in Saint-Quentin-Fallavier.

He is believed to be the man seen driving back and forth past the factory before the attack occurred at around 10:00 local time (08:00 GMT), the newspaper said.

A spokesman for Air Products said: "We can confirm that an incident occurred at our facility in L'Isle-d'Abeau, France this morning.

"Our priority at this stage is to take care of our employees, who have been evacuated from the site and all accounted for."

French Prime Minister Manuel Valls has ordered that security be stepped up at sensitive sites around Lyon.

Alain Juppe, the mayor of Bordeaux, took to Twitter to condemn the attack.

"The terrorist threat is at a maximum," he said, adding that France "must make every effort to protect its citizens".