Residents on Buttington Road, in the Monkmoor area of Shrewsbury, were told to stay inside as armed officers arrived at around 8.40pm and blocked off an alleyway while the police helicopter circled above.
At around 10pm officers in marked and unmarked cars arrived at Monkmoor Industrial Estate, off Monkmoor Road, where armed officers were heard shouting: "Armed police, get down!"
West Mercia Police has now confirmed that officers were looking for a man with a knife.
A spokesman said: "Officers were called last night (Friday September 17) at around 8pm to reports of a man armed with a knife in Shrewsbury.
"Officers that attended the incident included armed officers, a dog unit and NPAS (the police helicopter).
"The man was located by officers around 11.10pm and taken into custody where he remains."
Despite being asked to stay inside, concerned residents gathered in the street to try and understand what was happening.
A short distance away, at the Abbey Foregate end of Monkmoor Road, a police car and blue Kia Cee'd also crashed.
Chen Xiong, manager of the Tim Tim takeaway, said he heard a loud noise at around 10.30pm.
"It looked like a big crash. I don't think anyone was hurt but I don't know."
Bob Griffiths saw the scene of the crash on his way home. He said: "A blue car looks like it had collided with a police car or vice/versa. The police car was severely damaged. The front corner of the blue car was also badly damaged."