The preparations came as four of his alleged victims were buried in Israel.
Police surrounded a house in Toulouse, trying to coax into surrendering the suspect in the Monday shootings at a Jewish school and the shooting deaths of three French paratroopers of north African descent last week.
French Interior Minister Claude Gueant said police were still talking to the suspect, identified as Mohamed Merah, 23, a French citizen of Algerian origin. Merah had cut off communications with police early Wednesday but French television says negotiations resumed as Merah tried to set the terms of his surrender. He is believed armed with a Kalashnikov assault rifle, a Mini-Uzi 9mm machine pistol and handguns.
A man claiming to be the gunman called France 24 early Wednesday, saying he had chosen his victims at random as part of a "much larger campaign" to protest the French ban on women wearing the full Islamic veil and the presence of French troops in Afghanistan.
Police said the suspect told them he has ties to al-Qaida and wanted to "take revenge for Palestinian children" killed in the Middle East, France 24 reported.
Shots fired from inside the house -- in the Cote Pavee neighborhood, about 2 miles south of the Jewish school -- injured two officers, police said.
The operation by elite special operations police began around 3:30 a.m. (10:30 p.m. EDT Tuesday), police said.
CNN quoted officials as saying the suspect belonged to a jihadist group called Forsane Alizza (Knights of Glory). The French government banned the group in January for trying to recruit people to fight in Afghanistan.
Police tried to get the suspect's mother to talk to him but she refused, saying she had very little contact with him, Gueant told reporters.
Police arrested the suspect's brother, who had been inside the house, officials said.
French President Nicolas Sarkozy was reported nearby for the funerals of the paratroopers.
Thousands participated in a ceremony in Jerusalem for the four Jewish school victims.
The crowd gasped as the bodies of Rabbi Jonathan Sandler, 30, his sons Aryeh, 6, and Gavriel, 3, and friend Miriam Monsonego, 8, arrived at the cemetery.
French Foreign Minister Alain Juppe, French Ambassador to Israel Christophe Bigot, Israeli government officials and the country's chief rabbis were among those in attendance.