A severed head covered in Arabic writing has been found at a US gas company in south-eastern France after an assailant rammed a car into the premises, exploding gas containers.

The grisly attack near France's second city of Lyon came on an especially bloody day worldwide, with at least 37 gunned down at a beach resort in Tunisia and 27 killed in a suicide bombing in Kuwait claimed by Islamic State extremists.

Speaking from a European Union summit in Brussels, French president Francois Hollande described it as a terrorist attack and said all measures would be taken to stop any future attacks on a country still reeling from Islamist assaults in January.

A suspect, named as 35-year-old Yacine Sahli, has been arrested and was already known to French intelligence sources, Mr Hollande said.

"The intent was without doubt to cause an explosion. It was a terrorist attack," he said.

"The attack was of a terrorist nature since a body was discovered, decapitated and with inscriptions."

French prosecutor Francois Molins told reporters on Friday that Salhi was "known to employees" at the factory.

He said Salhi entered the site with ease at the wheel of a delivery van, which he often drove to the Air Products gas and chemicals factory.

The married father-of-three drove into the factory at 9:28am (local time), and disappeared from the vision of security cameras until 9:35am, when the van was seen accelerating towards one of two hangars.

A minute later a massive blast was heard.

The blast destroyed part of the hangar and severely damaged the delivery van.

Firefighters were called and arrived at the site at 9:41am and minutes later found the suspect inside one of the hangars, which contained bottles of gas, liquid oxygen and highly explosive acetone.

Sorry, this video has expired Louis Bernard, the founder of crisis management firm Layer Cake, discusses the attack from Paris

"Firefighters surprised the suspect while he was busy opening bottles of acetone," said Mr Molins.

The headless body of a 54-year-old man was found lying near a car along with a knife.

"At an angle not covered by (the) camera, his head was hung onto the fence surrounded by two Islamic flags bearing the Shahada, the profession of (Muslim) faith," said Mr Molins.

He said Salhi was being probed for murder and terrorism offences.

Salhi's sister and wife were also being held as well as a fourth person suspected of terrorism-related offences, however his link to the attack was not given.

Authorities were still working to identify the victim of the beheading, but he is believed to be a local businessman.

AFP was reporting the man was the employer of the suspect now in police custody, according to legal sources.

Molins said "investigations are just beginning" and said investigators were still trying to unravel exactly what happened, how the victim was killed and "if he was decapitated ante-mortem or post-mortem".

He said they were also focusing on whether Salhi had an accomplice but "there is no sign that allows us to confirm the suspect was accompanied by the suspect in the factory or an accomplice who acted as a lookout before the act was carried out".

Witnesses said there was only one person in the vehicle.

French police stand guard next to a black plastic sheet outside the Air Products company. ( Reuters: Emmanuel Foudrot )

French interior minister Bernard Cazeneuve said the arrested suspect did not have a criminal record but had been under watch as being possibly radicalised.

"This person was the subject of an "S" ["security"] file for radicalisation in 2006, which wasn't renewed in 2008. He didn't have a criminal record," Mr Cazeneuve said.

"This individual has links with the Salafist movement, but had not been identified as having participated in activities of a terrorist nature."

Mr Cazeneuve said the local firefighter who overpowered and "neutralised" Sahli had shown "courage and kept a cool head".

"I would like to offer my deepest thanks to the firefighter and his colleagues who came to the scene for their promptness and effectiveness."

Police have taken an unknown number of people into custody for questioning in connection with the case, but it was not immediately clear if any of them played a role in the attack, Mr Cazeneuve said.

Mr Hollande said security had been stepped up sharply around similar sensitive locations to prevent other possible attacks.

"There is emotion but emotion cannot be the only response. There has to be action, preventive steps, dissuasion.

"That means to stand by our values and not to give into fear - never - and to be equal to whatever happens without creating needless divisions or suspicions.

"In short, we must do what the French people expect of us - to protect them, and at the same time establish the truth and wipe out the groups and the individuals who are responsible for such acts."

France named as primary target for terrorist attacks

France, which has deployed aircraft to the international coalition fighting Islamic State insurgents in Iraq, has long been named on Islamist sites as a primary target for attacks.

In April, prime minister Manuel Valls said no fewer than five attacks had been thwarted in the country since the Charlie Hebdo killings in January.

Then, Islamist gunmen killed 17 people in the offices of the Charlie Hebdo satirical weekly and a Jewish food store.

Noting that hundreds of French nationals are in Syria where they risked being radicalised by Islamist fighters, Mr Valls said "never has the threat been so high".

The site of Friday's attack belongs to Air Products, a US-owned industrial gases and chemicals company, according to a spokeswoman for Air Liquide, a French company in the same sector.

It was immediately cordoned off by police and emergency services.

No group claimed responsibility for the attack and the motive is unknown.

Australian Foreign Minister Julie Bishop said the attack showed Australia had been correct to increase its counter-terrorism resources.

Ms Bishop left the Liberal Party conference in Melbourne for a briefing on the incident and said early evidence indicated it was a terrorist attack.

"It reminds us that we must be ever-vigilant about the possibility of a terrorist attack in Australia," she said.

"That is why the Australian Government is expanding our security, law enforcement and intelligence agencies to deal with these risks."

French police secure the entrance of the Air Products company. ( AFP: Philippe Desmazes )

Reuters