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A police spokesman said that according to eyewitness accounts, the car "intentionally" rammed into the crowd at around 2.30 p.m. local time (8:30 a.m. ET).
"At least 30 people are injured, some of them severely," according to the spokesman. Earlier, police said that young children were among the wounded.
The spokesman said he could not confirm the driver's motive for the incident. Police said earlier that the driver of the car had been arrested.
The interior ministry of the federal state of Hesse said in a statement that the suspect ''drove at high speed." It added that the man in the custody ''is currently not interrogatable."
"Due to the situation on site, an attack currently cannot be ruled out," the statement added.
The ministry said that a special unit had been set up in the Frankfurt Police Headquarters to handle the incident, and that the police presence had been strengthened across Hesse.
North Hessen Police have warned against the spread of unconfirmed information. The force has asked witnesses who may have videos or photos from the scene to submit them through a special police portal, urging them not to share the images on social media.
He said he "saw a silver Mercedes had broken through the police blockage" and "headed directly to the crowd."
"I counted up to 15 people laying in the street and the walkway. Several small children laying and crying," Schulten added. At least four or five helicopters were picking up patients from the site, he said.
Volksmarsen is a small town with roughly 6,000 residents, located near Kassel, in the north of the federal state of Hesse in central Germany.
According to Schulten, the carnival parade is a tradition in the town, with some 30 floats and 1,000 people taking part. He estimated that more than 5,000 people were watching in the streets.
All carnival events across Hesse were canceled on Monday after the incident in Volkmarsen. North Hessen Police said the move was a precaution.
Police in Mainz, a city in the neighboring state of Rhineland-Palatinate, said security at the carnival event happening there on Monday had been tightened, with surveillance drones deployed.