The university issued an alert on its website at 9:37 a.m. Thursday saying the gunman was reported near Dietrick Hall, a three-story dining facility.
The dining hall is steps away from the dorm where the first shootings took place in the 2007 that left 33 dead.
The campus-wide alert was later lifted and students and staff were told to resume their normal activities, according to an email sent at 2:42 p.m. The email said there would be a large police presence on campus throughout the day.
The children said they saw the man walking fast toward the volleyball courts, carrying what might have been a handgun covered by some type of cloth. Virginia Tech Police Chief Wendell Flinchum said the three children were interviewed, and that the information they gave was deemed credible.
Officials said they were looking for a white man with light brown hair who is 6 feet tall. The person was said to be wearing a blue and white striped shirt, gray shorts and brown sandals. He was described as clean shaven, according to the university's website.
Police swarmed the area but said they could not find a gunman matching their description. The university posted a message on its Twitter account that no other sightings had been reported but asked people to stay inside.
The school posted an update on its website around 1 p.m. saying authorities were combing through buildings on campus. Classes were canceled for the day, and the school said searching the buildings would be a long process. A composite sketch was posted on the school's website.
Federal authorities fined the school in March after ruling that administrators violated campus safety law by waiting too long to notify staff and students about a potential threat after two students were shot to death April 16, 2007, in West Ambler Johnston Hall, a dorm near the dining facility.
An email alert went out more than two hours later that day, about the time student Seung-Hui Cho was chaining shut the doors to a classroom building where he killed 30 more students and faculty and himself. It was the deadliest mass shooting in modern U.S. history.
Several thousand students attending summer classes, as well as the school's 6,500 employees, were on campus when the alert was issued, said University spokesman Larry Hincker. Many of the school's 30,000 students are on summer break and will return when the fall semester begins Aug. 22.
Police from Virginia Tech, Blacksburg and Christiansburg are searching for the man, as well as Montgomery County sheriff's deputies.
The Associated Press contributed to this report.