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The attack took place near the city’s main opera house in an area full of bars, restaurants and theatres which were brimming on a weekend night.
French President Emmanuel Macron said: “France once again pays the price of blood.”
Prosecutors cited witnesses as saying the man shouted “Allahu akbar” (God is greatest) as he went on the rampage, and added that a terror investigation had been launched.
The Islamic State group claimed responsibility, according to the SITE monitoring group.
“The executor of the stabbing operation in the city of Paris is a soldier of the Islamic State and the operation was carried out in response to the calls to target the coalition states,” a “security source” told IS’s official Amaq news agency, according to SITE.
The man attacked five people with a knife, one of whom died, police said. Two were in serious condition and all the victims are in hospital.
Interior Minister Gerard Collomb hailed in a tweet the “sang-froid and reaction of the police who neutralised the attacker.”
A large area was cordoned off where police, fire and rescue vehicles converged.
Shocked tourists and residents looked on from behind the security perimeter.
“I was on the cafe terrace, I heard three, four shots, it happened very fast,” said 47-year-old Gloria.
“Then the bartenders told us to come inside very quickly. Then I went out to see what was going on, and then I saw a man on the ground,” she added.
France has suffered a series of major Islamist attacks over the past three years, including the massacre at the satirical newspaper Charlie Hebdo, the November 2015 attacks that killed 130 in Paris, and the 2016 Bastille Day truck attack in Nice.
A state of emergency put in place just after the 2015 Paris attacks was lifted in October when Macron’s centrist government passed a new law boosting the powers of security forces.
Thousands of French troops remain on the streets under an anti-terror operation known as Sentinelle, patrolling transport hubs, tourist hotspots and other sensitive sites.