Amid widespread disruption in the capital, new Prime Minister Gordon Brown warned the alert was a fresh warning of the threat faced by Britain, which soon marks the second anniversary of suicide attacks, which killed 52 people.

The head of Scotland Yard's counter-terrorism unit Peter Clarke would not speculate on who was behind the bomb, found near a nightclub.

But he said: "Even at this stage it is obvious that if this device had detonated, there could have been significant injury or loss of life."

Clarke said police had no warning of an attack but said there were some similarities with "previous plots".

"Nightclubs have been named by terrorists as potential targets," he said.

Members of an Islamist-inspired gang were jailed for life earlier this year after plotting to attack a number of high-profile British targets, including London's Ministry of Sound nightclub.

A security source quoted by Britain's Press Association news agency said it was "entirely possible" the incident had overseas links as insurgents in Iraq had used similar methods.

"There are various things: it is outside a nightclub, it is a vehicle-borne device, it is close to the anniversary of the July 7 attacks. But we are keeping an open mind."

New Home Secretary Jacqui Smith -- less than 24 hours into the role -- said after meeting Brown in Downing Street: "We are currently facing the most serious and sustained threat to our security from international terrorism.

"This latest incident reinforces the need for the public to remain vigilant and alert to the threat that we face at all times."

Smith earlier chaired a meeting of the government's emergency contingencies committee "COBRA" and reported to Brown's senior ministers at an extended cabinet meeting.

Clarke said an ambulance crew treating a person at the "Tiger, Tiger" nightclub on The Haymarket street called in police explosives experts after noticing a metallic Mercedes car giving off smoke, at about 1:00 am.

Inside, the officer said, they found "significant quantities" of petrol and a "large number" of nails.

Police sources said there was as much as 60 litres of petrol on the back seat of the car and in the boot (trunk).

As the car was taken away for forensic examination, Brown -- who took over as prime minister from Tony Blair Wednesday -- said the incident was a reminder of the "serious and continuous" security threat facing Britain.

A hunt was under way for the driver with detectives expected to scour footage from closed circuit television cameras in streets surrounding the busy Haymarket, which is a haven for tourists, theatre-goers and revellers.

Cameras used to recognise car number plates for London's traffic congestion charge would also be able to trace the route of the vehicle into the capital. Michael Clarke, professor of defence at King's College London, said: "They will find out about this very quickly.

"Any car coming into central London would be on a lot of surveillance footage. Also nobody can make a bomb without leaving behind a lot of DNA."

The alert came ahead of the second anniversary of the July 7, 2005 attacks in London that killed 56 people, including four Islamist suicide bombers.

Britain has been on the second highest level of security alert -- "severe" -- since the British Islamist extremist bombers detonated homemade bombs on three Underground trains and a bus two years ago.

Two of the bombers justified the actions because of Britain's involvement in Iraq, where three British soldiers were killed in a roadside bomb attack Thursday.

The domestic intelligence service MI5 said a "severe" threat level means there is a "serious and sustained threat from international terrorism to the UK and UK interests overseas", particularly from al-Qaeda.

But an intelligence source quoted by the Press Association said "all options" were being considered, including dissident Irish republican groups opposed to the Northern Irish peace process.

European governments have been on increased anti-terrorist alert in recent months. Asked about the London bomb, French President Nicolas Sarkozy said that "the alert level in France is high".