French police have foiled a plot that could have set in motion the biggest bomb attack since an Algerian Islamist group killed eight people and injured close to a hundred on a Paris subway train in the 1990s, a public prosecutor said on Thursday.

Forensics experts believe that bomb-making material discovered in a garage east of Paris was sufficient to make an explosive device like the lethal one planted on a packed Paris train in 1995, prosecutor Francois Molins said.

The case revives the spectre of attacks by Islamist groups angry at French foreign policy in Afghanistan, the Middle East and Africa, as well as memories of Mohamed Merah, the young al Qaeda-inspired gunman who killed seven people including three Jewish children in southwestern France in March.

Molins was speaking four days into an investigation in which police have quizzed 12 people who were rounded up in raids last Saturday. Another suspect was shot dead after he fired at police with a Smith & Wesson revolver.

Molins said the police operation had dismantled what he called "a terrorist group that is probably the most dangerous (seen in France) since 1996".

Seven of the 12 were being placed under official inquiry on suspicion of terrorist activity, while five others taken into custody at the weekend were being released, he told a news conference.

Police moved in on the suspects after a late-September attack on a kosher food shop north of Paris. Molins said that attack, using what he described as an M75 grenade of the kind made in the former Yugoslavia, was intended to kill, even if nobody died.

Follow-up surveillance of the suspects triggered last Saturday's police raids in the southern city of Cannes, in Strasbourg in eastern France and in Torcy, a suburb east of Paris where the police found a garage packed with bomb-making materials.

Along with a shotgun, rifle, 800 bullet rounds and cash, police found a large quantity of potassium nitrate, sulphur, five metres of cable, alarm clocks, headlamp bulbs and a pressure cooker that could serve as a bomb casing.

"It's exactly the same kind of device as was used in 1995 by GIA militants," Molins said, referring to the Algerian-based Groupe Islamique Arme, or Armed Islamic Group in English.

The 1995 attack was followed by another similar attack in 1996 in which two people were killed, taking the total death toll to 10 and the number of injured to about 200.

"I am not making comparisons but simply highlighting that in terms of danger and preparations - notably all the materials that were set to be part of the explosive device - we've not seen a similar case in French judicial police records since 1996," Molins said.

"Investigators rapidly unearthed very worrying details on the state of planning progress."

All seven suspects placed under official inquiry were suspected of taking part in terrorist activities and two of them were also suspected of playing a role in seeking volunteers to join Jihadi missions abroad, including to Syria, said Molins.

One of the two suspected of recruiting jihadists had made trips to Egypt and Tunisia, a former French colony, spending three months away from France with the man who was killed in the weekend raids, he said.

Analysts say militants could have many motives to stage attacks in France.

"The terror threat in France is extremely high because it comes in multiple forms," Roland Jacquard, president of the International Terrorism Observatory, said.

"You have Pakistan-Afghanistan connections that stem from old al Qaeda networks, internal groups that have self-radicalised, al Qaeda in Islamic Magreb, and French intelligence services are also worried about violent terrorist reaction as a result of France's hard stance on Syria and Iran," he said.-Reuters