A man fitting the description of Raoul Moat was tonight in a stand-off with police.
Officers surrounded the riverside area of Rothbury in Northumberland amid eyewitness accounts that Britain's most wanted man was holding a gun to his head.
The 37-year-old is wanted in connection with a triple shooting which left one man dead a week ago.
A Northumbria Police spokesman said: "A man who fits the description of Raoul Thomas Moat has been located in the riverbank area in the vicinity of Rothbury.
"Police are currently negotiating."
Armed police descended on the village as the hunt for the fugitive spread to the countryside north from Newcastle.
Paula Mason told the BBC her mother was "terrified" as she was trapped in her home inside the police exclusion zone.
"She said a marksman told her to get in with a gun," she said.
"I just spoke to her on the phone. She's absolutely terrified, she's on her own."
She added that her mother was not being allowed to leave her home and was "absolutely petrified".
"She said he is sitting with a gun to his head. The police are surrounding him."
An armed officer on the eastern approach into the village said: "I cannot explain the gravity of the situation. You're welcome to stay here but he (Moat) is on the other side of the primary school tennis courts and he is still armed."
Juliette Ballantyne, from Whitton View, said she had seen snipers down by the river.
Mrs Ballantyne, who lives to the east of Rothbury town centre, said: "I am nervous. My mother in law lives nearby. I hope she's okay."
As armed police swamped the area an ambulance arrived and made its way to the river side.
Shouting could also heard coming from the area.
The dramatic scenes followed the news that detectives were pursuing "valuable" new leads a week into the investigation after recovering three mobile phones used by Moat during his time on the run.
Experts said the devices could contain a goldmine of information about the former nightclub doorman, including details about his calls, texts, contacts, and even his former location.
The first of the three handsets was found in Birtley in the early hours of Saturday - at the scene where Moat's ex-lover Samantha Stobbart, 22, was shot and her new boyfriend, Chris Brown, 29, killed.
A second phone, used to make the two 999 calls to police before and after 42-year-old Pc David Rathband was shot early on Sunday, has also been recovered - but police would not say from where or when.
The third was spotted by a member of the public in the Rothbury area.
Police said it had not been used by the gunman since the two alleged hostages, Karl Ness and Qhuram Awan, were found on Tuesday. Both have since appeared in court charged with conspiracy to murder.
Retired taxi driver Dave Murray, 67, of Knocklaw, said Moat appeared to have been chased through the village and was heading east before being cornered at the primary school tennis courts and bowling green.
He said: "There is nowhere for him to go, the river is on one side and this road and all the police on the other.
"They should go ahead and shoot him and be done with it and save us all a lot of money."
One of the police officers guarding the entrance to the village, who would not be named, said: "We're keeping everybody out of his line of sight because if he gets a shot off we want no-one getting hit."
A string of armed police could be seen leaving the Recreation Club car park and filing down towards the river.
A steady stream of police cars sped into the town and parked up in the car park.
Officers were given a briefing by a superior.
A local believed the scene was by the stepping stones which span the river.
New arrivals were quickly donning helmets and armour.
Chris Robertson told the BBC he thought he had seen Moat holding a sawn-off shotgun to his neck.
He said: "We walked over and saw the guy standing on the other side of the river. He looked like he had a sawn-off shotgun pointing to his neck."
Speaking over the phone to reporters, he added: "As far as we know they're in the woods. Basically the whole place is under siege."
People living in the area allowed armed police to gain access to the river banks.
The scene is only a couple of hundred yards upstream from where the Lexus was found on Tuesday.
A local woman said a search at around 2.15am, including the use of the police helicopter, focused on the same spot earlier.
Two NHS incident response unit ambulances fitted with CCTV and blacked-out windows entered the cordoned area and parked where police are massing in the club car park.