The armed offenders squad is assisting as a precaution, police say.
Motueka St at the intersection of Tipahi St was closed.
St John has been placed on standby and an ambulance, rapid response vehicle and a manager have been sent.
Victory Primary School told RNZ it is in lockdown and was told to stay there just after 10.30am.
The school was waiting for further instructions from police.
Nelson Intermediate School is also in lockdown and says all students are safe, accounted for and in classes with staff.Nelson College and Hampden Street School also both confirmed on Facebook they were in lockdown.
Near the scene, Artistic Beauty Salon owner Karen told RNZ what she could see.
"Well I have been able to hear an alarm go off for about 10-15 minutes, and I have come out onto the roadside and up by the hospital between Franklin St and Motueka St.
"We've got two cop cars blocking the road and down the end of the street heading towards Vanguard.
"Up Vanguard St we've got another police car blocking the road there and we have another undercover cop car with some police holding a gun," she said.
Nelson City Council said the incident has caused traffic delays on Waimea Rd and the surrounding areas.
The eBus route 3 was diverted away from Motueka St and Franklyn St, the council said. This will likely cause delays along the route for the rest of the day.