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The man is believed to have an explosive device strapped to him.
He is as yet unidentified, and is said to be in regular contact with the police.
The attack happened at a post office in the Ukrainian city of Kharkiv.
At least 20 police patrol cars are on the scene, as well as a hostage negotiator.
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Regional police chief Oleg Bekh told TV news: "We are trying to do everything to maintain communication with him and to do everything that is necessary to ensure the people are released."
He said the armed man had said he was angry about the recent prisoner exchange between the Ukrainian authorities and pro-Russian separatists and thought more should have been released.
Hundreds of prisoners were swapped on Wednesday in the biggest such exchange since the start of a civil war in the region that has killed over 10,000 people.
Police were called at about 14.40 local time (12.40 GMT) after a post office worker said a man had entered in a mask looking to rob the bank.
“We are trying to do everything to maintain communication with him and to do everything that is necessary to ensure the people are released”
Regional police chief Oleg Blokh
TV footage showed police and emergency vehicles outside the post office.
National media say that Ukraine had more than 120 terror attacks per month this year.
It isn't known if any of the hostages have been injured.