Police set up a cordon around part of Rothbury, ordering people to stay indoors for their own safety, as marksmen swamped the area.
The streets were deserted apart from police officers standing guard on the eastern approach road to the village.
One of the officers, who would not be named, said: "We're keeping everybody out of his line of sight because if he gets a shot off we want no-one getting hit."
A string of armed police could be seen leaving the nearby Recreation Club car park and filing down towards the river.
Witnesses described how Moat had been cornered by police near the river and was holding a sawn-off shotgun to his neck.
Paula Mason told reporters her mother who lived nearby was "terrified" as she was trapped in her home inside the police exclusion zone.
"She said a marksman told her to get in with a gun," she said.
"I just spoke to her on the phone. She's absolutely terrified, she's on her own."
She added her mother was not being allowed to leave her home.
Another eyewitness Chris Robertson said he thought he had seen Moat holding a gun to his head.
"We walked over and saw the guy standing on the other side of the river. He looked like he had a sawn-off shotgun pointing to his neck."
Speaking by phone to reporters, he added: "As far as we know they're in the woods. Basically the whole place is under siege."
Mountain biker Ben Storey had been out cycling when he inadvertently stumbled across the police operation as he rode across a bridge near the river.
"There was about 10 armed officers and they all had their guns pointed at one man," the 19-year-old builder said.
Shouting could be heard coming from the area and reports suggested Moat appeared agitated at times.
Police negotiators reassured him that he was not going to be hurt and repeatedly told him to him to put down his gun.
The scene where Moat was cornered is only a couple of hundred yards upstream from where the Moat's Lexus car was found on Tuesday.
A local woman said a search at about 2.15am, including the use of the police helicopter, focused on the same spot earlier.
Armed police had descended on the village as the hunt for the fugitive spread to the countryside north from Newcastle.
Last night's dramatic scenes followed confirmation that detectives were pursuing "valuable" new leads a week into the investigation after recovering three mobile phones used by Moat during his time on the run.
The first handset was found in Birtley early on Saturday – at the scene where Moat's ex-lover Samantha Stobbart, 22, was shot and her new boyfriend, Chris Brown, 29, killed.
A second phone, used to make the two 999 calls to police before and after 42-year-old Pc David Rathband was shot early on Sunday, was also recovered and a third was spotted by a member of the public in the Rothbury area.
Police said it had not been used by the gunman since the two alleged hostages, Karl Ness and Qhuram Awan, were found on Tuesday. Both have since appeared in court charged with conspiracy to murder, believed to have been part of a conspiracy to hunt down and kill policemen.
Hundreds of police officers from 15 different forces, many of them specialist marksmen and sniffer dog handlers, were involved in the hunt.
Earlier yesterday, armed police stormed a flat in Huddersfield after police received an anonymous tip-off that Moat could be inside.