"Fortunately, no hostages are physically injured," said police spokesman Dennis Krull.
A 20-year-old suspect was overpowered and detained. Police were still investigating whether one of the hostages could possibly be an accomplice of the detained suspect.
For tactical reasons, the police had refused to provide any information about possible demands, but later revealed that the 20-year-old German suspect was known to police and had been charged with violent and property offences in the past.
Shortly before special forces stormed the building, eyewitnesses said two loud bangs had been heard and that police officers had run towards the pharmacy.
Police said they had established contact "inside the pharmacy" very early on in the operation in the centre of Karlsruhe on one of the main streets.
The emergency services closed off a large area around the pharmacy, where numerous police vehicles and ambulances could be seen.
The police also opened up a school for residents to stay in as the closure of several streets meant some people living locally were unable to reach their homes.
The public were not in danger, according to the police, who asked people to avoid the area and follow any instructions issued by the emergency services.
The mayor of Karlsruhe, Frank Mentrup, thanked the emergency services and said he hoped that the hostages would be able to come to terms with what they had experienced as quickly as possible following their release.
"Karlsruhe is relieved that this dangerous situation was ended without bloodshed," he said in a statement on Friday evening.
"I am deeply saddened that such an act took place in our midst," Mentrup said.
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