Two police officers were 'seriously injured' in the attack and officials confirmed a 'female foreign tourist' was also wounded.
Last night, police were searching the suspect's house in Chelles - an eastern Paris suburb - despite his ISIS nickname The Belgian leaking on their Amaq news agency.
It was also reported he was previously jailed for 20 years for shooting at cops in 2003, after being caught driving a stolen car - but was released early.
He is also thought to have been known to security services for "extremist links" and is believed to have been questioned recently in Meaux, outside Paris, after “informants” told cops he was “seeking to obtain weapons to kill policemen."
Cops have said they are hunting a second suspect who may have been involved in the attack.
Local police advised people to avoid the area after shots were fired at around 9pm local time.
Witnesses said the attacker pulled up beside a stationery police car and fired through the window.
"He parked just behind the van and he got out with a Kalashnikov and I heard six gunshots," a witness named Chelloug said.
"I thought they were firecrackers, because we all looked around the road and there was no one.
"In fact, he was hidden behind the van and shooting at the police.
"As soon as we saw that, we all ran back inside (a building). We hid and I went up to the first floor and we saw them (the policeman) shoot him (the perpetrator)."
He added: " I was afraid. I have a two year-old girl and I thought I was going to die... He shot straight at the police officer."
President Francois Hollande said officials were "convinced" the incident is a terror attack, even before ISIS claimed responsibility.
Paris Prosecutor's anti-terror office has opened an inquiry.
“One or several attackers have been shot dead by the police. Some officers were hit but the bullets were stopped by their bulletproof vests, but two were hit.
“Nothing is being ruled out for the time being, terrorism or a criminal act."
"The shooting started shortly after 9pm, when a car stopped alongside a stationary police car.
"A man immediately got out and opened fire on the police car, fatally wounding a police officer. He also wounded a second one, it would seem very seriously."
The shooting happened near the Métro station Franklin D Roosevelt and the Marks and Spencer store on the Champs-Elysées.
It is one of the most famous streets in the world and a busy tourist hub.
Armed police and emergency services have been spotted at the scene.
French Presidential candidates Marine Le Pen and Francois Fillon have cancelled their trips tomorrow.
The attack comes just days after police arrested two men in southern Marseille with weapons and explosives who were suspected of preparing an attack to disrupt the first-round of the presidential election on Sunday.
The UK Foreign Office said: "The British Embassy is in contact with local authorities and urgently seeking further information following reports of a shooting incident on the Champs-Elysees in Paris.
"You should remain vigilant and follow the advice of the local security authorities and/or your tour operator.
"If you're in the area and it is safe to do so, contact your friends and family to tell them you are safe."