Explosions and heavy gunfire were heard coming from the compound in Abidjan as troops loyal to Alassane Ouattara stormed the building.
Last-minute UN negotations to avert bloodshed failed and the internationally recognised winner of the country's disputed presidential election appeared unwilling to wait any longer.
Gbagbo has steadfastly refused to cede power since his poll defeat in November but is now surrounded by Ouattara's men.
'The negotiations which were carried out for hours yesterday between the entourage of Laurent Gbagbo and Ivorian authorities have failed because of Gbagbo's intransigence,' French Foreign Minister Alain Juppe told parliament.
Gbagbo earlier denied reports that he was willing to surrender, and rejected demands he recognise Ouattara as the winner of the poll.
Last night Gbagbo was said by diplomats to be holed up in a bunker under his presidential residence, surrounded on all sides by soldiers loyal to his rival Ouattra.
A French government source said today that gunfire had erupted at Gbagbo's residence in Abidjan, as Ouattra's forces attempted to seize the rogue president.
Affousy Bamba, a spokeswoman for troops backing Mr Ouattara, said: 'Yes they [Ouattara forces] are in the process of entering the residence to seize Gbagbo.
'They have not taken him yet, but they are in the process, they are in the building.'
Members of Gbagbo's cabinet claim that Ouattra's forces have been instructed to remove Gbagbo from his presidential bunker unharmed.
The Ivory Coast leader has been cornered and his own troops are rapidly disbanding after being outgunned by French and UN airstrikes.
On Tuesday, dozens of Gbagbo's soldiers close to his luxurious compound were seen entering a church where they stripped off their uniforms and abandoned their weapons.
Earlier, Gbagbo's three top generals said they had ordered their men to stop fighting, the United Nations said in a statement.
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