Police have arrested a man over an alleged hostage drama at a tiny Northland settlement.

About 50 police swarmed into Matauri Bay, 24km north-east of Kaeo, this afternoon evacuating some people from their homes and ordering others to stay indoors.

Some people were trapped in their homes, some children in a school, and others have been evacuated from the area.

Northland police, including the armed offenders squad and negotiators, sealed off a narrow gravel no-exit road leading to an address where the armed hostage-taker was believed to be holding three children.

It is believed they were aged one, two and 11.

TV3 reported at 6.40pm the drama was over and a man had been taken into custody.

The 54-year-old Morrinsville man was visiting relatives in the area when the family members became involved in a domestic dispute.

Northland police communications officer Sarah Kennett said after the dispute the man left one address with some family members and moved to another address.

"Police were alerted to the incident and subsequent inquiries revealed that the man was in unlawful possession of a firearm," she said.

"The armed offenders squad and a police negotiator are at the scene and people living in the sealed off area are being prevented from accessing their homes," Ms Kennett said.

"Police are aware of the inconvenience to members of the public, but are keeping people away from the area for their own safety."

A local businessmen said he had been told that the hostage drama followed a domestic incident.

The owner of a Matauri Bay store said police came into the store about 1.30pm and told staff not to leave.

"At that stage I don't think they knew where he (the gunman) was."

The woman said six staff were in the store, which is on the main street of the town, waiting for the alert to be over.

"The police told us to stay indoors and keep the doors locked for our own safety."

The man was believed to be in a house with the children a short distance from the store, she said.

"I don't think he is a local but I think the children have family here."

Matauri Bay School and the local kura kaupapa had been locked down, with the children being kept in the buildings until police gave the all-clear.

- NZPA