The PSNI has reportedly intercepted a large bomb in a transit van in the Brandywell area of Derry.
Two men, aged 35 and 37, have been arrested and taken to Antrim Serious Crime Suite for questioning.
Police say they are continuing to deal with the security alert in the Letterkenny Road area of the city, following the discovery of a suspicious object in a vehicle.
Around 100 homes in the Brandywell area have been evacuated and the British army bomb disposal team remain at the scene.
PSNI detectives dealing with the incident are linking it to dissident Republican activities.