Residents on Buttington Road, in the Monkmoor area of Shrewsbury, were told to stay inside as armed officers arrived at around 8.40pm on Friday 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 confirmed that officers were looking for a man with a knife.
A 28-year-old man from Shrewsbury was arrested but has since been released on bail, police say.
They have also offered reassurances that it was an "isolated incident" and there have been no reports of anyone being injured.
A spokesman for West Mercia Police said: "Following reports of a man with a knife on Friday officers were called to Monkmoor Industrial Estate at around 8pm. Officers that attended the incident included armed officers, a dog unit and NPAS (the police helicopter).
"A 28-year-old man from Shrewsbury was located by officers at around 11.10pm and arrested on suspicion of making threats to kill.
"He was taken into custody and has now been released on bail.
"We would like to also take this opportunity to reassure the local community that this was an isolated incident, and we have received no reports of anyone being injured or assaulted."