It was not immediately clear who was firing the gunshots.
A security source with contacts inside the compound, the Government Palace, said an unknown number of people had been hit by the gunfire.
A second source said two people were dead but it was unclear who they were.
Sissoco Embalo held an extraordinary cabinet meeting at 10am on Tuesday, entering the building with a heavy security detail, a diplomatic source said.
The West African regional bloc ECOWAS condemned what it described as an attempted coup in Guinea-Bissau.
"ECOWAS is following with great concern the evolution of the situation in Guinea-Bissau...where military gunfire is taking place around the government palace," the organisation said.
"ECOWAS condemns this attempted coup and holds the military responsible for the safety of President Umaro Sissoco Embalo and members of his government."
Normally busy streets around the palace were deserted on Tuesday afternoon, a civil society activist said.
Members of government consulted by Reuters to confirm the events did not answer their telephones.
Political instability has blighted Guinea-Bissau for decades.
Nine coups or attempted coups since independence from Portugal in 1974 have hobbled efforts to pull the economy beyond its reliance on the export of cashew nuts.
