UPDATE: Algerian TV reports that 15 foreign hostages, some of the French, have escaped from the captors.
The hostage-takers have demanded safe passage from the gas field, with their captives.
The killing of a British national, one of two murdered by militants during a hostage-taking at an Algerian gas field, was "cold-blooded murder" which cannot be excused by ideology or Western actions in Mali or Libya, Foreign Secretary William Hague has said.
British special forces are reportedly on standby and Hague said the Government is working "around the clock" to resolve the Algerian hostage crisis, where 41 foreign nationals are believed to have been taken hostage.
A number of Britons are among the group being held after armed Islamist militants stormed a natural gas field in the eastern part of the North African country.
Western hostages have been forced to wear belts strapped with explosives, France 24 reported, quoting one of the hostages.
The French channel said a man had called them to say the hostage-takers were heavily armed and were prepared to blow up the natural gas field if rescue was attempted.
The channel could not verify the call, and said it did not know if the man was speaking under duress.
Speaking from Australia, where he is attending the Australia-UK Ministerial Consultations, Foreign Secretary William Hague says there is no excuse for the attack.
He says: "This is an absolute tragedy, of course, in this dangerous and rapidly developing situation. The next of kin have been informed.
"The Government's Cobra emergency system is in full operation, I have spoken to our ambassador in Algeria and dispatched a rapid deployment team to Algeria to strengthen our embassy there and help them in their work.
"Excuses being used by terrorists and murderers who are involved, there is no excuse for such behaviour, whatever excuse they may claim.
"It is absolutely unacceptable, of course. It is in this case the cold-blooded murder of people going about their business. So there is no excuse, whether it be connected to Libya, Mali or anywhere else."
British Special Forces were on standby on Wednesday night to mount a rescue mission, according to The Times.
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.
Senior al-Qaeda commander Mokhtar Belmokhtar has been identified as the leader behind the attack, according to the BBC.
Algerian forces were on Wednesday night reported to have been surrounding the hostage-takers and negotiating for the release of their captives, but details of what was happening on the ground were sketchy.
The Foreign Secretary said the situation was "extremely dangerous" and details could not be given out "lightly".
In particular, the Foreign Office has been 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, which is part-controlled by BP, close to the Libyan border.
Six others are said to have been wounded, including two foreigners, two police officers and two security agents.
"A number of people are held hostage. This does include a number of British nationals. This is therefore an extremely dangerous situation," Hague 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, which met Wednesday, would have further meetings.
"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.
Downing Street said Prime Minister David Cameron "expressed his sympathy and support" when he spoke to his counterpart Abdelmalek Sellal Wednesday evening.
"They agreed to keep in touch as the situation progresses," a spokeswoman said.
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 by 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.