The man fired a shot and took four people hostage, including the bank's manager, in the southern French city and wants to negotiate with the elite RAID police unit that shot dead Al-Qaeda-inspired killer Merah, police said.
"We're taking measures so we can start a dialogue" with the hostage taker, Toulouse prosecutor Michel Valet said at the scene where police have set up a 200-metre (yard) cordon around the bank.
Parents of pupils at a nearby school have been sent text message telling them to pick up their children, witnesses said, and rapid-intervention GIPN police units have been dispatched from southern cities Bordeaux and Marseille.
The RAID unit that shot dead Merah after he went on a killing spree is based in Paris, hundreds of kilometres to the north.
The bank and Merah's former flat are within five hundred metres of each other in Toulouse's Cote Pavee neighbourhood, east of the city centre.
Merah was killed at the end of a 32-hour siege of his flat after he shot dead seven people -- three soldiers, and three children and a teacher at a Jewish school in Toulouse -- in a wave of killings that shocked the country.
The 23-year-old who claimed to be an Al-Qaeda militant filmed himself carrying out the attacks and reportedly confessed to police before he was shot dead.