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Police said the two assailants were killed during an operation to free hostages who were being held in the church in Saint-Etienne-du-Rouvray, a southern suburb of Rouen located 128 kilometres north-west of Paris.
Officials said a priest was killed by the assailants, who were armed with knives. French media reported that the priest’s throat had been slit.
A statement by the archbishop of Rouen, Dominique Lebrun, named the victim as 84-year-old Jacques Hamel.
An interior ministry spokesperson said a second hostage was “between life and death”.
Local media said the hostages included two nuns and two churchgoers.
Live TV images showed police had blocked off the roads around the church and paramedics were seen pulling stretchers out of ambulances.
The identities of the attackers and their motive remain unclear, but anti-terrorism investigators have been summoned in the case.
French Prime Minister Manuel Valls expressed “horror at the barbaric attack on a church”.
“The whole of France and all Catholics are wounded. We will stand together,” he wrote on Twitter.
At the Vatican, the pope’s office condemned the “barbarous killing” of the priest, saying the crime was even more heinous because it took place in a sacred place.
Both French President François Hollande and Interior Minister Bernard Cazeneuve are en route to the site of the attack.
The incident comes as France is under high alert after an attack in Nice that killed 84 people and a string of deadly attacks last year claimed by the Islamic State (IS) group.
The Nice attack was the third major strike on France in 18 months. Two attacks in Germany claimed by the IS group since then have also increased jitters in Europe.
After the attack in Nice, France extended a state of emergency giving police extra powers to carry out searches and place people under house arrest for another six months until January.
It was the fourth time the security measures have been extended since IS group jihadists struck Paris in November, killing 130 people at restaurants, a concert hall and the national stadium.