Itar-Tass news agency said negotiations had begun with the gang of up to 17 men and women who stormed into the secondary school in North Ossetia province during a morning ceremony marking the first day of the new school year.
The gang, some strapped with explosives and reported to have mined the school grounds, set free 15 children soon after launching the assault, Itar-Tass news agency said. Nearly 50 children escaped in the initial confusion.
The assault in the town of Beslan bore the signs of a Chechen rebel operation and was the latest in a recent spate of deadly attacks in Russia which have killed more than 100. But Chechen separatists said they had nothing to do with it.
At least eight civilians were 400 held hostage in school killed - seven dying of wounds in hospital, news agencies quoted officials as saying.
Witnesses said sporadic gunfire resounded throughout the day. There was at least one loud bang from inside the school.
"Every gunshot I hear is like a shot into my heart," said one woman, Vera, tears pouring down her cheeks. Her child was among the hostages.
The exact number of hostages remained unclear, but local police eventually put the number at between 300 and 400. Tass said 132 children were among them.
There were no details on the negotiations, but Tass said the attackers had rejected offers to deliver food and water for the hostages. Most of those held were pupils aged seven to 17.
The attackers demand a meeting with top regional officials to discuss demands for the release of fighters seized in neighbouring Ingushetia in June during a rebel raid there.
The attackers had earlier threatened to kill children if their lives were at risk.
"They have said that for every fighter wiped out they will kill 50 children and for every fighter wounded - 20," regional Interior Minister Kazbek Dzantiyev told reporters in Beslan.
As darkness fell, there were no signs of an end to the siege of the two-storey brick building, surrounded by hundreds of troops. Armoured vehicles stood nearby.
President Vladimir Putin, facing a major challenge to his security policies, broke off his seaside holiday and rushed to Moscow. But he made no public statements. In a surprise move, Russia called for a UN Security Council meeting on "terrorist acts" in the country.
Moscow has for years rejected any outside role and criticism of its own role in Chechnya, insisting it was a domestic affair.
But Russian officials have recently been pointing more to foreign involvement in the attacks, possibly linked to al Qaeda.