Witness Paula Mason said her mother could see British fugitive Raoul Moat sitting with a gun pointed to his head outside her house in the town of Rothbury in Northumbria this evening.
Police confirmed that a man who fits Moat's description had been found in the riverbank area of Rothbury and they are currently negotiating.
Mrs 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.”
Shouting could be heard coming from the area.
Incredibly, a local man reported seeing an angler fishing in the river.
A witness believed marksmen were directing their attentions to the south side of the river.
More armed police from unmarked cars were donning their gear in a car park next to Rothbury Recreation Club.
Retired taxi driver Dave Murray, 67, of Knocklaw, of the eastern edge of the town, said: “We've heard nothing but I'm staying indoors and watching it unfold on the news.
“We don’t really know what it is going on but it looks like this could be it.”
Mr Murray’s house overlooks the main road into the village from the east.
He added: “It looks like something’s happened between the Queen’s Head pub on the main street and a garage repair shop a little further down the street where they have a lot of people penned in.
“It’s deserted between there and here and the only way into the village is through all the police.
“I am getting loads of texts to my phone but nobody seems to know what is going on.”
Two police vehicles were involved in a collision as they rushed to the riverside.
Judith Ellis told the BBC the rush to get to the scene was “mayhem”: “I am shaken up. I saw the snipers and they were trained on something to the left.”
The dramatic scenes in the small Northumberland town 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.
Detective Chief Superintendent Neil Adamson, who is spearheading one of the biggest manhunts in living memory, said the past 24 hours had provided “some very positive developments”.
Police also investigated a possible sighting of Moat walking through the centre of Rothbury.
The witness report came hours after Temporary Chief Constable Sue Sim told a packed public meeting that Moat was unlikely to be “walking down the street with a gun”.
Armed police also swooped on a stately home on the outskirts of Rothbury today as the round-the-clock search continued.
Cragside House, which lies on the outskirts of the village, was closed to the public as dozens of officers with dogs swarmed around the property, guarding the entrances.
Police also revealed they had arrested a man and a woman on suspicion of assisting an offender. Two other men arrested have been released on bail after being questioned.
Amid raised tensions today, armed police guarded schools in Rothbury at the request of concerned parents.
The move came after police said Moat posed a threat to the “wider public” - and not just police officers.
Hundreds of police officers from 15 forces, many of them specialist marksmen and sniffer dog handlers, are now involved in the hunt.
Mark Dennett of Northumbria Police tonight warned residents of Rothbury to “stay inside for your own safety” as a major police operation got under way in the town.