Bomb experts were called to The Haymarket, near Piccadilly Circus, police have reported, where they examined a suspicious vehicle.
A police representative said: "They discovered what appeared to be a potentially viable explosive device. This was made safe."
The police spokesman confirmed that the suspicious device was a bomb, and explained that counter-terrorism officers were now investigating the matter.
The alert was sparked when a member of the public reported a suspicious vehicle shortly before 2am, which led to the street being immediately sealed off while police investigated.
The street is now likely to remain closed for the foreseeable future, officials indicated.
The bomb threat, which appears to have been aimed at distracting the mood of the nation after Gordon Brown became Britain's new Prime Minister, has renewed fears of more terrorist attacks on the capital.
Prime Minister Brown reacted to the news of the defused bomb, telling the BBC that Britain faced a "serious and continued terrorist threat". "It does recall the need for us to be vigilant at all times," he said.
The area of Haymarket, right in the heart of London's West End, has been cordoned off and Picadilly tube station remains closed.
A representative of St James's Church in Piccadilly, however, said that the defused bomb had not affected the church.
