Hundreds of Bedouin have been demonstrating in Madfouna since police shot dead a tribesman during clashes on Monday.
"There are 700 bedouins at least taking part in the protest. Some opened fire heavily in the air," Moussa Salem, who was taking part in the demonstration, said.
A police official denied that any hostages had been taken, but confirmed protesters had surrounded the station and that negotiations were ongoing.
The protests erupted after police on Monday opened fire on a vehicle driven by "two Bedouin suspects" who they say ignored orders to stop. One was killed and the other wounded.
The dead man was identified as a drug dealer by the state news agency MENA, although the tribesmen deny that allegation.
Hundreds of Bedouin demonstrated against the killing, with some firing guns into the air and burning tyres.
The Bedouin inhabitants of the Sinai peninsula have repeatedly complained that they are subjected to regular searches and harassment by security officials, and that police regularly arrest tribesman.
Relations between the Egyptian authorities and Bedouin have always been strained, but deteriorated futher following a spate of bombings at popular tourist destinations in the region between 2004 and 2006.
Police blamed the attacks on a group of Bedouin and thousands of tribesmen were subsequently arrested.
Around 200,000 formerly nomadic Bedouin live in northern Sinai.
The Egyptian authorities have regularly promised to pump resources into impoverished northern Sinai, which has one of the country's highest unemployment rate.