One individual who witnessed the shooting from his office, Vincent van Roon, told CNN that "I was there at the moment of the shooting".
He declined to comment on the number of injured or what condition the victims were in.
Counter terror police chief Pieter-Jaap Aalbersbergconfirmed said earlier today the shooting "appears to be a terrorist attack".
'It is a shooting incident in a tram.
The air ambulance service said it had deployed three helicopters to the scene.
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In June, two terror suspects were arrested while close to carrying out attacks including at an iconic bridge in Rotterdam and in France, prosecutors said.
Police say they are considering terrorism as a motive, and officials raised the country's threat level to the highest.
Police warned citizens not to approach the man, whom they identified as Gokman Tanis, but call authorities instead.
At a press conference, police confirmed reports of gun shots at "several locations across Utrecht".
Dutch Prime Minister Mark Rutt said he was "deeply concerned" and that crisis talks were to be held in response to the incident.
"We can't rule out terror", Aalbersberg told reporters.
"If it is a terror attack then we have only one answer: our nation, democracy must be stronger than fanaticism and violence", he added. "We will never give into intolerance, never".
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The National Anti-Terrorism Coordinator (NATC) said it raised the terrorism threat level to 5 in all of Utrecht area, the highest for the emergencies of this kind.
The Utrecht municipality said it advised "everyone to stay indoors until more is known".
Tanis remains in police custody.
After the shooting, German police increased surveillance and security on the country's border with the Netherlands and were on the lookout for the suspect.
The shooting took place at about 10:45 local time (09:45 GMT).
Police, including heavily armed officers, flooded the area - a busy traffic intersection in a residential neighbourhood.
The media is reporting that a gunman fired indiscriminately at people on the tram.
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