A severed head covered in Arabic writing was found at a US gas company in southeast France on Friday, police sources and French media said, after two assailants rammed a car into the premises, exploding gas containers.

Speaking from a European Union summit in Brussels, French President Francois Hollande described it at a terrorist attack and said all measures would be taken to stop any future attacks on a country still reeling from Islamist assaults in January.

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

"Two individuals deliberately rammed a car into the gas containers to trigger an explosion," a police source said.

It was not known whether the victim, so far the only known fatality in the incident that also injured two people, was decapitated before or after the car smashed into the building, or whether the victim had been on site at the time of the attack, or killed elsewhere.

"The attack was of a terrorist nature since a body was discovered, decapitated and with inscriptions," Hollande told the news conference.

ISLAMIST FLAG

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

Local newspaper Le Dauphine said the head covered in Arabic writing was found on a fence.

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

France, which has deployed aircraft to the international coalition fighting Islamic State insurgents in Iraq, has long been named on Islamist sites as a primary target for attacks.

In April, Prime Minister Manuel Valls said no fewer than five attacks had been thwarted in the country since the Charlie Hebdokillings in January.

Then, Islamist gunmen killed 17 people in the offices of the Charlie Hebdo satirical weekly and a Jewish food store.

Noting that hundreds of French nationals are in Syria where they risked being radicalised by Islamist fighters, Valls said "never has the threat been so high".

The site belonged to Air Products (APD.N), a US industrial gases and chemicals company, according to a spokeswoman forAir Liquide, a French company in the same sector. It was immediately ringfenced by police and emergency services.

The chairman and CEO of Air Products is Seifi Ghasemi, who in 2011 testimony to a US Senate committee described himself as Iranian-born. Mainly Shi'ite Iran is a sworn enemy of Sunni-dominated Islamic State.

No group claimed responsibility for the attack and the motive was unknown.

French Interior Minister Bernard Cazeneuve was at the site in the town of Saint-Quentin-Fallavier, around 30 km (20 miles) southeast of the city of Lyon.

French media said the government had ordered security to be stepped up around sensitive sites in the surrounding Rhone-Alpes region.