A priest is dead after being taken hostage in a church in northern France by two armed men who had links to the Islamic State (IS) terror group, President Francois Hollande says.

Key points: Two armed men took five people hostage inside church in Saint-Etienne-du-Rouvray

Two armed men took five people hostage inside church in Saint-Etienne-du-Rouvray Both attackers killed in police operation to end assault

Both attackers killed in police operation to end assault French leaders, Pope express shock and condemnation over attack

It appeared the priest's throat was slit, a source told Reuters.

A nun who escaped the attack said the assailants forced the priest to kneel before filming the murder.

The knifemen launched their assault by taking five people hostage inside the church in the Normandy town of Saint-Etienne-du-Rouvray, south of Rouen.

Interior Ministry spokesman Pierre-Henry Brandet said one of the hostages had been killed, another was in a critical condition and three were freed unharmed.

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Police shot the attackers dead as they emerged from the church with their hostages.

French President Francois Hollande said the hostage takers were terrorists who had pledged allegiance to IS.

"Daesh has declared war on us, we must fight this war by all means, while respecting the rule of law, what makes us a democracy," he told reporters at the scene.

Mr Hollande said the threat from Islamic militants had never been so great in France and Europe.

"The threat remains very high," he said.

"The Catholic community has been hit, but it is all of the French public which is concerned."

A policeman stands guard outside the city hall in Saint-Etienne-du-Rouvray. ( Reuters: Pascal Rossignol )

Hollande calls for unity

Mr Hollande called for "unity" in the country and rejected opposition calls to further harden anti-terrorism legislation.

"Restricting our freedoms will not make the fight against terrorism more effective," he said, adding that changes made to legislation already gave authorities sufficient "capacity to act".

"What the terrorists want is to divide us, separate us, to tear us apart. We must avoid one-upmanship, arguments, conflation, suspicions."

Two men took five hostages in Saint-Etienne-du-Rouvray in Rouen. ( AFP: Charly Triballeau )

IS's Amaq news agency said two "soldiers" carried out the Normandy church attack.

"They carried out the operation in response to the call to target the countries of the crusader coalition," the Amaq statement said.

A source close to the investigation said one of the attackers had been charged with terror links and held before being freed on bail.

French Interior Minister Bernard Cazeneuve said the Parisian anti-terror prosecutor would take on the investigation.

Police said one person had been arrested in connection with the attack.

Pope feels 'pain and horror' of church attack

Prime Minister Manuel Valls branded the attack, which came with France on edge after the Bastille Day massacre which left 84 people dead in Nice, as "barbaric".

"The whole of France and all Catholics are wounded. We will stand together," he wrote on Twitter.

The archbishop of Rouen, Dominique Lebrun, urged all non-believers to join those of the church in "calling to God".

"The Catholic Church can take up no other weapons than prayer and fraternity between men," he said in a statement.

The Vatican has condemned the "barbarous killing", saying Pope Francis was horrified by the news.

"We are particularly shocked because this horrible violence took place in a church in which God's love is announced," Vatican spokesman Father Federico Lombardi said.

He said the pope was feeling "the pain and horror of this absurd violence" and "condemned in the most radical way any form of hate".

The attack was the latest in a string of deadly assaults including the mass killing in Nice, southern France, on Bastille Day 12 days ago and four incidents in Germany, most recently a suicide bombing at a concert in Ansbach on Sunday.

It has heaped yet more pressure on Mr Hollande to regain control of national security, with France already under a state of emergency 10 months ahead of a presidential election in which he is widely expected to seek a second term.

Map The location of Saint-Etienne-du-Rouvray where several people were taken hostage

AFP/Reuters