Two attackers arrived at a gas factory near Grenoble in a car, bearing banners written in Arabic, and set off explosions.

France's anti-terror prosecutor said the attack was carried out by "a terrorist group" and it is understood one man has been arrested.

The decapitated head was found at the site of a US gas company in southeast France.

One official, who spoke on condition of anonymity, said the torso was found near the site of the explosion but that the victim was not decapitated by the blast.

Two flags, one white and one black and both with Arabic inscriptions, were found at the scene.

Injured

The official said police were searching for anyone else possibly involved in the attack, in which one person was killed and at least one other was injured this morning.

France's anti-terror prosecutor said the attack was carried out by "a terrorist group".

At least one person holding an Islamist flag drove into the plant and rammed into gas canisters at about 10am, causing an explosion. The decapitated body was found nearby, it said.

The French public prosecutor said its anti-terrorist section had been deployed to investigate.

Police sources said the decapitated head was found at the site, along with a flag bearing Islamist inscriptions.

"It is definitely a terrorist attack," Joelle Huillier, a Socialist member of parliament for the Isere region, said on BFM TV. "I am terrified. No one is safe."

Local newspaper Le Dauphine said the head was also covered in Arabic writing.

One suspect had been arrested and was already known to French intelligence sources, one of the sources said.

Appalling

British Prime Minister David Cameron has spoken to French President Francois Hollande at the EU summit in Brussels to express his sympathies over what Downing Street described as the "appalling incident" near Grenoble.

The two leaders were attending a European Council summit.

A Downing Street spokeswoman said: "He [Mr Cameron] expressed his sympathies for what looks like an appalling incident.

"Details are still emerging, so we wait to see those. But it clearly looks an extremely concerning situation and our thoughts are with all those affected by it."

The attack comes after 17 people were killed at a satirical magazine and a kosher grocery in Paris in January by a radicalised trio, catapulting France's capital on to the front pages of newspapers around the world.

The French government mobilised 10,000 soldiers to guard vulnerable sites around the country.

The attack today was at a factory belonging to Allentown, Pennsylvania-based Air Products.

Situated in an industrial zone outside the French town of Saint-Quentin-Fallavier, the site produces gas used by industry and hospitals, according to a website dedicated to local industries.

In addition to the factory, the company has a customer services centre in Aubervilliers outside Paris.