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Prime Minister David Cameron said there were "strong indications that it is a terrorist incident" and the UK would "never buckle" in the face of such attacks.
Footage has emerged showing a man wielding a bloodied meat cleaver and making political statements.
There are unconfirmed reports that the dead man was a soldier.
Both French President Francois Hollande and MP Nick Raynsford said the dead man had been a soldier at Woolwich barracks.
In developments since the attack, in John Wilson Street, the A205, at 14:20 BST:
- Downing Street said Mr Cameron, who had been planning to stay in Paris overnight after meeting the French president, would be returning to the UK later on Wednesday
- At a meeting of the government's emergency response committee, Cobra, it was decided to tighten security at Woolwich and other barracks in London
- Both shot men were taken to hospital, one by air ambulance
- One of the men is in a serious condition, the other is also being treated for injuries
- In a joint press conference, Mr Hollande said he wanted to express his solidarity with the UK after the "murder of a British soldier", but Mr Cameron did not confirm the victim had been a serviceman
- The Ministry of Defence said it was urgently looking into reports the incident had involved a soldier
- Another Cobra meeting will be held on Thursday morning, chaired by Mr Cameron
One witness, identified only as James, said two men had attacked another man, aged about 20, who was wearing a T-shirt of military charity Help for Heroes.
"These two guys were crazed. They were just animals. They dragged him from the pavement and dumped his body in the middle of the road and left his body there," he told LBC radio.
He said after the "horrendous" attack, the two men, who were also in their 20s, stood around, waving knives and a gun, and asked people to take pictures of them "as if they wanted to be on TV or something".
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