Islamic militants have reportedly killed a British national after armed men stormed a natural gas field in Algeria.
A number of foreign workers are said to have been taken hostage in the dawn attack on the facility part-operated by BP.
On Wednesday night Algerian forces were surrounding the hostage-takers and negotiating for the release of their captives, according to local security officials.
An Islamist group claimed it was holding 41 westerners - including seven Americans - in retaliation for the French military intervention against al Qaida-backed rebels in neighbouring Mali.
However details of the incident remain sketchy and there are fears the number of hostages could be higher.
Prime Minister David Cameron chaired a 45 minute meeting of Whitehall's Cobra emergency committee to discuss the emerging crisis.
The Foreign Office was unable to confirm a report by the Algeria state news agency that a British national was among two people killed in the attack on the In Amenas gas facility close to the Libyan border.
Six others are said to have been wounded, including two foreigners, two police officers and two security agents.
Cameron's official spokesman said: "The ongoing incident has involved various nationalities, including several British nationals.
"We are working with BP to support the families of staff and provide consular assistance."
The Irish government said a 36-year-old Irishman was among the hostages. He was believed to be unharmed.
The Algerian interior ministry said the attack began when three vehicles carrying heavily-armed-militants ambushed a bus carrying employees from the gas plant to the nearby airport.
Initially they were driven off, but they then headed for the main complex.
"After their failed attempt, the terrorist group headed to the complex's living quarters and took a number of workers with foreign nationalities hostage," an interior ministry statement said.
"The forces of the People's National Army and security services arrived at the scene and immediately took all necessary measures to make the area secure and seek a rapid resolution of the situation, which is being very closely followed by the national authorities."
The militant group Katibat Moulathamine - "The Masked Ones" - later contacted a news agency in the Saharan state of Mauritania to claim that the raid was carried out an affiliate group, identified as "Those who sign their names in blood".
A spokesman for the Katibat told the Sahara Media Agency that 41 Westerners of nine or 10 nationalities had been taken hostage, including seven Americans.
Five foreigners were being held in a factory, while 36 others were in living quarters at the plant, claimed the spokesman, who said the action was carried out in retaliation for Algeria allowing France to use its airspace to carry out raids on northern Mali.
Britain has provided two RAF C-17 transport aircraft to support the operation as well as offering to share intelligence with Paris.
The In Amenas facility is jointly operated by BP, the Norwegian company Statoil and the Algerian state oil company Sonatrach.
BP said in a statement that there was "an ongoing security incident" in the gas field, which was "attacked and occupied by a group of unidentified armed people" at about 5am UK time.
"Contact with the site is extremely difficult, but we understand that armed individuals are still occupying the In Amenas operations site," the statement said.
"Our absolute priority is the safety and security of our staff. We do not yet have confirmed information on the status of personnel at the site but believe some are being held by the occupiers."
Statoil said that it had 20 employees in the facility. The Norwegian Newspaper Bergens Tidende reported that a 55-year-old Norwegian working on the site called his wife to say he was among the hostages.
The Japanese government said Japanese employees working for a company which supplies services to the site may also have been kidnapped.
The attack happened as EU foreign ministers were preparing to meet tomorrow in Brussels to discuss plans to send a 400-strong military training mission to Mali.
Europe Minister David Lidington said that Britain could make a "small contribution" to the mission but stressed that it would not be involved in combat operations.
"The EU training mission is an entirely distinct initiative from the French-led military response," he told a Commons committee on Europe, adding that it would terminate after 15 months.
"It remains a clearly bound and time-limited project. It is not ill-defined or prone to mission creep. The training mission is not mandated to take part in combat."
Foreign Secretary William Hague said the crisis was "extremely dangerous" and the Government would be working around the clock to resolve it.
"A number of people are held hostage. This does include a number of British nationals. This is therefore an extremely dangerous situation," he said.
"We are in close touch with the Algerian government, the Algerian military have deployed to the area and the prime minister has spoken to the prime minister of Algeria.
"We are liaising very closely with all levels of the Algerian government."
He said that a rapid deployment team had been sent from the Foreign Office to reinforce British embassy and consular staff in Algeria. The Government's emergency response committee Cobra would continue to meet.
"We will give more details as it becomes possible to do so but obviously it is a very dangerous situation and we cannot give out details very lightly. We will keep people informed," he said.
Hague said BP was doing "a good job" keeping the loved ones and families of those involved in the incident up to date.
"The safety of those involved and their co-workers is our absolute priority and we will work around the clock to resolve this crisis," he added.
A Downing Street spokeswoman said: "The Prime Minister has spoken with his Algerian counterpart, Prime Minister Abdelmalek Sellal, and was updated on the latest situation on the ground.
"The Prime Minister expressed his sympathy and support for the Algerian Government. They agreed to keep in touch as the situation progresses."