Officers closed Racecourse Road between its junction with Alder Road and Ballyarnett Roundabout in Derry following the discovery of a suspicious device outside a house.
A section of Ballyarnett Village has also been closed to traffic.
Around 30 families were moved from their homes.
Army technical officers are at the scene.
PSNI Chief Inspector Tony Callaghan said: “ATO now say that the suspicious object was a viable device.”
A clearance operation is now underway to make the device safe.
“I would urge anyone who sees anything out of the ordinary in the area to maintain a safe distance and report it to police immediately,” added Chief Inspector Callaghan.
Local politicians condemned those behind leaving the device.