Thames Valley Police said armed officers returned fire after a man started shooting from a property in Paradise Street this afternoon.
Emergency services remain on the scene as of 10.30pm after initially responding to a report a man had access to a gun at 1.15pm.
Thames Valley Police said: "Officers remain in Paradise Square tonight working to resolve the incident. Thank you to everyone in the community for your patience and understanding."
An earlier statement issued by the force at 5.15pm said officers were negotiating with a man.
Police vehicles were continuing to arrive on the scene at 8.30pm.
Paradise Square, Paradise Street, Castle Street and Norfolk Road in the city centre have been closed and people are being urged to avoid the area.
Police said the incident is "contained" and is not terror-related.
Earlier this afternoon, a Thames Valley Police spokeswoman told Express.co.uk: “Officers are currently in Oxford city centre at an ongoing incident.
“Armed response officers are at a residential property in Paradise Square following a report shortly after 1.15pm today that a man had access to a firearm.
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“Shots were fired from the property and police returned fire.
“Officers are currently negotiating with the man as they work to resolve the situation.
“Norfolk Road is closed while officers are dealing with the incident and members of the public are asked to avoid the immediate area where emergency services are present.”
Superintendent Joe Kidman, Oxford Local Policing Area Commander said: “People in Oxford will notice an increased police presence in the area while officers are dealing with the incident, which is contained and taking place at a residential property.
“If you have any concerns or wish to raise anything please approach and speak to an officer or call the non-emergency number 101.”
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A Paradise Square resident said police had told him he could not return to his home because of a “firearms incident”, the Oxford Mail reported.
Pictures and video taken at the scene show a large police presence. One image shows officers wearing body armour and carrying helmets entering the cordon at Paradise Street.
Footage shows a team of eight paramedics carrying a stretcher packed with equipment towards the scene. The medics can also be seen carrying body armour and helmets.
People living in the cordoned-off areas say they have been told to stay in their homes.
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One eyewitness said they heard a series of loud bangs, which they believed to be gunshots, before seeing armed police arrive on the scene.
Another tweeted to say there were “helicopters hovering” after a “shooting behind Oxford Castle”.
They added they had been asked to remain in their hotel room.
A third resident warned people to avoid the area around Oxford Castle because of a "gunman".
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They tweeted: “#oxford friends stay well clear of castle/Westgate area, street outside our flat is sealed off after ongoing situation with gunman.
“Haven’t heard shots for an hour but shouting, barks, helicopters have continued.”
One resident in Paradise Square told the Oxford Mail: "I was coming home with my kids and police wouldn't let us into the street.
"I heard about five gunshots and there was an armed response.
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"Flats have been evacuated and police were trying to talk someone down from their balcony.
"Police told me to stay in my house."
David Gallagher, a spokesman for South Central Ambulance Service, said medics were attending a “police incident” in Paradise Square.
He said one patient is being treated near the scene for injuries that are not life-threatening, but he did not provide any more information.
He added: "We have another ambulance and a rapid response vehicle at the scene and further resources en route to support those already at the scene, but there are currently no further patients."