Police have removed the silver Mercedes -- parked near busy Piccadilly Circus -- which they say contained a "potentially viable explosive device."
Peter Clarke, Britain's national coordinator of terrorist investigations, said the car was noticed by an ambulance crew who had been called to a nearby nightclub.
He said that the ambulance crewmembers "also noticed that there appeared to be smoke inside the vehicle. The police were called and the Metropolitan Police explosives officers went to the scene and examined the car. In the car they found significant quantities of petrol together with a number of gas cylinders. There were also a large number of nails in the vehicle."
Prime Minister Gordon Brown, who took office on June 27, said the incident is a reminder that Britain faces "a serious and continuous threat."
"This incident does recall the need for us to be vigilant at all times and the public to be alert at any potential incidents," he said. "And I will stress to the cabinet that the vigilance must be maintained over these next few days."
He said new Home Secretary Jacqui Smith would chair a meeting of the government's crisis-response committee, named Cobra, and report to the cabinet.
Defense Secretary Des Browne called it a "very serious incident" in an interview with the BBC.
News reports quote police as saying the bomb was large.
The incident has disrupted traffic and public transport in the city center.
Britain has been on its second-highest level of security alert, "severe," since British Islamists detonated bombs on three subway trains and a bus in July 2005, killing more than 50 people.
(compiled from agency reports)