Armed police officers descended on Cobden Street in Palfrey along with firefighters and paramedics at around 1pm.
Police have said a silver 4x4 had crashed into a stationary black VW Golf at the junction of King Street and Cobden Street.
One occupant was injured, another was unhurt, and a female pedestrian was also hurt during the incident, the force confirmed.
Seconds later shots were fired from another vehicle and the occupants of the 4x4 set their vehicle alight and made off. The fire spread to the VW Golf and to a nearby house.
A man has been taken to hospital after being shot and the woman injured in the collision has injuries to her legs, both are in a serious but stable condition. Two other people were treated for smoke inhalation at the scene.
Detective Inspector Chris Fox, from West Midlands Police's CID, said: "What happened this afternoon is a confusing series of events, which we’re trying to understand.
"Violence like this on our streets is not acceptable. I understand it’s a shocking and disturbing incident, but I do believe the people in the cars were targeting each other.
"We’re doing all we can to learn more about what took place and why, and I’d urge anyone with any information to get in touch as soon as possible."
A total of 19 firefighters were sent to put out the blaze which had spread to two cars and a house. Videos posted on social media showed flames leaping from two cars which had reportedly been deliberately set on fire.
Thick black smoke was pouring into the sky from the vehicles as the flames spread to a nearby building.
Meanwhile police armed with semi-automatic weapons were sent along with paramedics from West Midlands Ambulance Service.
A West Midlands Fire Service spokesman said: "We can confirm that four crews attended just after 1pm today. Two fire engines from Walsall, one from West Brom and one from Willenhall were sent.
"The fire that involved two cars and a property was extinguished quickly by crews at the scene."
A spokesman for West Midlands Ambulance Service later confirmed that paramedics were called to "reports of a road traffic collision and a car and house fire".
"On arrival we discovered a total of four patients," he said.
"A man, who was treated for gunshot injuries, and a woman who was treated for injuries sustained in the road traffic collision were both taken to hospital with serious but non life-threatening injuries.
"Two other patients, a man and a child, were assessed for the effects of the smoke inhalation and discharged at the scene."
Officers were seen knocking doors, and forensic teams dressed in white overalls were also seen probing the incident.
The shell of a burnout car was located within the cordon, with its paint completely stripped.
One man, who wished to remain anonymous, said: "I'm not really shocked [to see the road taped off]. We heard someone got shot. This happens quite often around here."
Anyone with information can contact West Midlands Police via live chat on the force's website or call 101, quoting log 2022 of May 4.