Emergency and military vehicles sped through town after the burst of gunfire, and ABC News reported that a voice on a megaphone was heard saying "Stop! Don't move!"
Immediately after the gunshots were heard, the Boston Police Department tweeted: "Police operations in the Franklin Street Watertown area. Residents shelter in place."
State police spokesman David Procopio says there is "renewed activity in Watertown" is connected to the search for 19-year-old college student Dzhokhar Tsarnaev.
Authorities are telling residents of the area to stay indoors.
Watertown resident Erik Thompson lives in the area where gunshots erupted less than an hour ago. He told ABC News:
"I don't really know anything except I can add to what I'm hearing on the news. There was some gunfire earlier which was almost immediately stopped, people were yelling to cease fire, seems to be focus on some homes across the street from where I am, which I think is the western side of the street. There's still a significant presence law enforcement here. There's no water there -- if it was a boat it would be a parked. It's like D-Day."
The gunshots rang out less than an hour after Massachusetts governor said transit service in Boston would be resuming even though the Boston bombing suspect is still on the lam.
State Police Col. Timothy Alben said at a news conference that he believed Tsarnaev was still in Massachusetts because of his ties to the area. But authorities lifted the stay-indoors warning for people in the Boston area, and the transit system started running again by evening.
"We can't continue to lockdown an entire city or an entire state," Alben said. At the same time, he and other authorities warned that Tsarnaev is a killer and that people should be vigilant.
Meanwhile, New Bedford police confirm to ABC that three individuals were taken into custody by the FBI late Friday afternoon in connection with the manhunt for Tsarnaev.
Lt. Robert Richards says three "college age" individuals were taken-in for questioning by the FBI. Richards says he does not believe these were arrests, that the individuals were merely taken-in for questioning.
Richards adds that the suspect may have lived or visited the residence at one point but could not say when. New Bedford is less than 15 miles north of Dartmouth, Mass., where Tsarnaev attend college.
Tsarnaev fled on foot early Friday morning after a furious overnight gun battle that left 200 spent rounds behind and after a wild car chase in which he and his brother hurled explosives at police, authorities said. His brother, 26-year-old Tamerlan Tsarnaev, died in the shootout, run over by his younger brother in a car as he lay wounded, according to investigators.
ABC News reports that in 2011, the FBI interviewed the 26-year-old on behalf of a foreign government but they found nothing derogatory and closed the file.
During the overnight spasm of violence, the brothers also shot and killed an MIT policeman and severely wounded another officer, authorities said.
Law enforcement officials and family members identified the brothers as ethnic Chechens who came to the U.S. from Russia. They lived near Boston and had been in the U.S. for about a decade, an uncle said.
Around midday, as the manhunt dragged on, the suspects' uncle Ruslan Tsarni of Montgomery Village, Md., pleaded on television: "Dzhokhar, if you are alive, turn yourself in and ask for forgiveness."
The search by thousands of law enforcement officers all but paralyzed the Boston area for much of the day. Officials shut down all mass transit, including Amtrak trains to New York, advised businesses not to open, and warned close to 1 million people in the entire city and some of its suburbs to stay inside and unlock their doors only for uniformed police.
"We believe this man to be a terrorist," Boston Police Commissioner Ed Davis said. "We believe this to be a man who's come here to kill people."
Some neighborhoods resembled a military encampment, with officers patrolling with guns drawn and aimed, residents peering nervously from windows and people near surrounded buildings spirited away.
The bloody turn in the case came just hours after the FBI released photos and video of two suspects in the bombing and asked for the public's help in identifying and catching them.
Authorities said the man dubbed Suspect No. 1 -- the one in sunglasses and a dark baseball cap in the surveillance-camera pictures -- was Tamerlan Tsarnaev, ">while Suspect No. 2, the one in a white baseball cap worn backwards, was his brother.
The bombings on Monday near the Boston Marathon finish line killed three people and wounded more than 180, tearing off limbs in a spray of shrapnel and sparking fears across the nation that another terrorist attack had come to U.S. soil.
Anzor Tsarnaev told ABC News that he spoke to his sons by phone earlier this week. "We talked about the bombing. I was worried about then," Anzor Tsarnaev said.
He said his son was studying medicine. "He is such an intelligent boy. We expected him to come on holidays here," the father said.
He said his sons reassured him, saying, "Everything is good, Daddy. Everything is very good."
The elder Tsarnaev insisted that his sons were innocent, but said he would appeal to his son to "surrender peacefully."
"Give up. Give up. You have a bright future ahead of you. Come home to Russia," the dad said.
The father warned, however, "If they killed him, then all hell would break loose."
Chechnya has been the scene of two wars between Russian forces and separatists since 1994, in which tens of thousands were killed in heavy Russian bombing. That spawned an Islamic insurgency that has carried out deadly bombings in Russia and the region, although not in the West.
But investigators have shed no light on the motive for the Boston Marathon bombing and said it was unclear whether any terrorist organizations had a hand in it.
The FBI was swamped with tips after the release of the photos -- 3,000 every second by one estimate -- but what role those played in the overnight clash was unclear. State Police spokesman Dave Procopio said police realized they were dealing with the bombing suspects based on what the two men told a carjacking victim during their getaway attempt.
Exactly how the long night of crime began was marked by conflicting reports. But police said the brothers carjacked a man in a Mercedes-Benz in Cambridge, just across the Charles River from Boston, then released him unharmed at a gas station.
They also shot to death a Massachusetts Institute of Technology police officer, 26-year-old Sean Collier, while he was responding to a report of a disturbance, investigators said.
The search for the Mercedes led to a chase that ended in Watertown, where authorities said the suspects threw explosive devices from the car and exchanged gunfire with police. A transit police officer, 33-year-old Richard Donohue, was shot and critically wounded, authorities said.
Dzhokhar Tsarnaev somehow slipped away. He ran over his already wounded brother as he fled by car, according to two law enforcement officials who spoke on condition of anonymity because they were not authorized to discuss the investigation.
Tamerlan Tsarnaev died at a Boston hospital after suffering what doctors said were multiple gunshot wounds and a possible blast injury.
The brothers had built an arsenal of pipe bombs, grenades and improvised explosive devices and used some of the weapons in trying to make their getaway, said Rep. Dutch Ruppersberger, D-Md., a member of the House Intelligence Committee.
Another uncle, Alvi Tsarnaev, who also lives in Montgomery Village, Md., told news organizations that Tamerlan Tsarnaev had called him Thursday night -- hours before his firefight with police -- and the two spoke for the first time in two or three years. He said the young man asked for forgiveness for the rift in the family.
"He said, `I love you and forgive me,"' the uncle said.
Watertown resident Kayla Dipaolo said she was woken up overnight by gunfire and a large explosion that sounded "like it was right next to my head ... and shook the whole house." She said she was looking at the front door when a bullet came through the side paneling. SWAT team officers were running all over her yard, she said.
"It was very scary," she said. "There are two bullet holes in the side of my house, and by the front door there is another."
Christine Yajko said she heard two loud explosions and gunfire. She said a police officer later knocked on her door and told her there was an undetonated improvised explosive device in the street and warned her to stay away from the windows.
"It was on the street, right near our kitchen window," she said.
Tsarni, the men's uncle, said the brothers traveled here together from Russia. He called his nephews "losers" and said they had struggled to settle in the U.S. and ended up "thereby just hating everyone."
U.S. government officials, speaking on condition of anonymity because they were not allowed to talk about an investigation in progress, said Tamerlan Tsarnaev traveled to Russia last year and returned to the U.S. six months later.
His last known address was in Cambridge, Mass. He had studied accounting as a part-time student at Bunker Hill Community College in Boston for three semesters from 2006 to 2008, the school said.
Dzhokhar Tsarnaev was registered as a student at the University of Massachusetts Dartmouth. Students said he lived in a dorm there and was on campus this week after the Boston Marathon bombing. The campus closed down Friday along with colleges around the Boston area.
The city of Cambridge announced two years ago that it had awarded a $2,500 scholarship to him. At the time, he was a senior at Cambridge Rindge & Latin School, a highly regarded public school whose alumni include Matt Damon, Ben Affleck and NBA Hall of Famer Patrick Ewing.
The men's father, Anzor Tsarnaev, said in a telephone interview with AP from the Russian city of Makhachkala that his younger son, Dzhokhar, is "a true angel." He said his son was studying medicine.
"He is such an intelligent boy," the father said. "We expected him to come on holidays here."
According to the FBI, Dzhokhar Tsarnaev was seen setting down a bag at the site of the second of two explosions at the marathon finish line.
Insurgents from Chechnya and neighboring restive provinces in the Caucasus have long been involved in terrorist attacks in Moscow and other places in Russia.
In 2002, Chechen militants took 800 people hostage in Moscow and held them for two days before special forces stormed the building, killing all 41 captors. Also killed were 129 hostages, mostly from the effects of the gas Russian forces used to subdue the attackers.
Chechen insurgents also launched a 2004 raid in the southern Russian town of Beslan and took hundreds of hostages. The siege ended in a bloodbath two days later, with more than 330 people, about half of them children, killed.
ABC News and the Associated Press contributed to this report
Take ABC13 with you!
Download our free apps for iPhone, iPad, Android and Blackberry devices