The Frenchman suspected of a spate of shootings in the Toulouse area planned more killings, prosecutors have said.
Anti-terror chief Francois Molins said the suspect, named as Mohammed Merah, 23, of Algerian descent, intended to kill a soldier and two police officers.
Merah, who says he was trained by al-Qaeda, is suspected of murdering three soldiers and four Jewish people.
Police have surrounded his flat and are trying to persuade him to surrender. He is said to be heavily armed.
Earlier reports said he had been captured, but officials later rebuffed the claims.
The killings took place in and around Toulouse in three separate incidents earlier this month.
On 11 March, a soldier was shot and killed while waiting to see a man about selling his motorcycle.
Days later, two soldiers were shot and killed and a third was wounded while waiting at a cash machine.
Then earlier this week, three children and an adult were shot and killed outside a Jewish school.
The four Jewish victims were buried in an emotional funeral in Jerusalem earlier.
In a news conference, Mr Molins said Merah had planned to kill a soldier later on Wednesday and also had plans to target the police.
"If he's telling the truth, he would have left his house this morning and he would have once again killed any soldier that he came across," the prosecutor said.
Mr Molins said the suspect had expressed no regret for the killings, but had said he wanted to kill more people and "bring France to its knees".
President Nicolas Sarkozy has attended a memorial at a military base in nearby Montauban for the three murdered soldiers.
Police moved into Merah's block after two officers were shot at when they tried to get into his flat.
Officials say he is heavily armed with a Kalashnikov high-velocity rifle, a mini-Uzi 9mm machine pistol, several handguns and possibly grenades.
The five-storey block of flats has been evacuated, and police have also moved residents from nearby buildings.
Hundreds of officers are now stationed outside the block.
Elsewhere in the city, police are hunting for accomplices and have detained several members of his family.
His mother was taken to the scene in the hope that she could persuade him to surrender, but she told police that she had no influence over her son.
Negotiators have been talking to Merah all day, but officials said he appeared to have no particular demands.
The suspect has said he acted to "avenge Palestinian children" and said he would give himself up.
Merah claimed to have received al-Qaeda training in Pakistan's Waziristan area, and also said he had been to Afghanistan.
His activities in Afghanistan are still unclear.
Afghan officials told the BBC he had been jailed in Kandahar for planting bombs in 2007, but escaped in a Taliban-led break-out in 2008.
Other Afghan sources cast doubt on the claims, saying the man jailed in Kandahar might have been a different person with the same name.
And Merah's lawyer, Christian Etelin, told the AP news agency his client had been in jail in France from December 2007 to September 2009 for a mugging offence.
Mr Etelin said those experiences could have "provoked hate for the justice system" and "laid the groundwork from which he threw himself into this religious fanaticism".
Mr Molins said Merah had visited Afghanistan twice.
He gave no details of the first visit, but said that during his second trip last year, Merah was captured by Afghan forces and handed to the Americans, who put him on a plane back to France.
But American officials told CNN that US forces had not dealt with Merah, and that the Afghans had handed him to French forces, who had returned him to France.