London bomb was packed with petrol, gas and nails

Deputy Assistant Commissioner Peter Clarke, head of Scotland Yard's counter-terrorism command, said: ''It is obvious that if the device had detonated there could have been significant injury or loss of life."

Bomb squad officers defused the bomb after police received reports of a suspicious vehicle in the early hours close to the Tiger Tiger nightclub in the heart of London's West End.

Mr Clarke said an ambulance crew in the area reported that there was smoke inside the car.

He said it was too early to speculate about who was involved and he called on the public to remain vigilant.

One police source said the bomb posed a real and substantial threat to the surrounding area, just yards from Piccadilly Circus.

A witness reported seeing gas canisters being removed from the car, believed to be a silver Mercedes, at around 4am.

There are also reports of nails seen on the floor of the vehicle.

A massive police cordon was thrown around The Haymarket in the heart of the capital's busy West End.

Dozens of forensic officers were today poring over the crime scene, which was covered by a blue plastic police tent.

Scotland Yard said detectives from Counter Terrorism Command were investigating the potential bomb plot.

A spokesman said: "Police were called to reports of a suspicious vehicle parked in The Haymarket, shortly before 2am this morning.

"As a precautionary measure the immediate area was cordoned off while the vehicle was examined by explosives officers.

"They discovered what appeared to be a potentially viable explosive device. This was made safe.

"The Metropolitan Police Counter Terrorism Command has launched an investigation."

Rush-hour commuters faced disruption as nearby Piccadilly Underground station was closed and was expected to remain so for most of the morning.

The Haymarket is in the heart of London's theatreland and close to the popular shopping area of Regent Street.

A housekeeper at the Theatre Royal in The Haymarket, who gave her name as Debbie, said that when she arrived at work this morning she was told by the police to stay at the back of the building.

She said the suspect car had been covered with blue tarpaulin and forensic officers dressed in white suits were seen going in and out.

She said: "We were allowed into the building through the back. Police are aware that we are in the building and we are working at the back.

"We can see a blue tent with the car inside and there are guys in white suits going in and out."

Debbie said the entire length of The Haymarket had been cordoned off as well as side streets leading to it.

Jack Straw, who was appointed Justice Secretary in new PM Gordon Brown's Cabinet reshuffle yesterday, said ministers had been informed of the incident "much earlier this morning".

He said it was "very saddening" but "these things happen".

Mr Straw insisted it was essential that announcements were made by the police rather than ministers.

He added: "Of course the police will try to ensure there is as little disruption as possible. But everyone understands the key priority is safety."

One eyewitness said door staff at the nightclub Tiger, Tiger alerted police after the car was driven into bins last night and the driver ran off.

The witness said the large silver saloon car was being driven "erratically" before the minor crash. The driver was not stopped.

Tiger, Tiger, a popular bar, club and restaurant with branches across the UK, is located at 29 The Haymarket.

Intelligence sources in London said they were keeping an open mind on who was responsible for the car bomb.

Defence Secretary Des Browne said: "It does appear to be a very serious incident.

"My first reaction to this is, thank God that we have police and explosives experts who can make these devices safe, and the arrangements they appear to have done, and that nobody has been injured."