Around a dozen people were lightly injured, some requiring hospital treatment, as people rushed out of bars and cafes fearing an attack, emergency services personnel told AFP.
France has been hit by a string of terror attacks in recent years, raising the levels of security, and concern, in the country.
Last month, an Islamist gunman killed four people and injured four others in a shooting spree in southwestern France. Nice suffered a terrible attack in 2016 when a Tunisian man ploughed a truck through a large crowd gathered for Bastille Day fireworks in the Mediterranean city, killing 86 people and injuring more than 400.
Monday's incident was the result of dispute between two couples. In a tweet, local mayor Christian Estrosi thanked local traders who sounded the alarm, allowing police to arrest the person wielding the alarm gun.