The horizontally-fired Mark 16 mortar has been linked to dissident republican paramilitaries.

A man is being questioned about the discovery of the bomb in the garage of a house on Elmwood Terrace in the mainly nationalist Bogside area on Monday.

About 10 houses on Tir Chonall Avenue and some houses on Elmwood Avenue were evacuated after the discovery.

There is a growing fear among the entire community that dissident republicans feel they should carry on their so-called war

Willie Hay DUP assembly member

Residents were kept out of their homes for several hours until the area had been searched.

Police Inspector Brian Hume said lives had undoubtedly been saved by the discovery.

"It is extremely significant," he said.

"Obviously it is a very deadly device and it could have caused death or injury.

"We have no indication but we suspect it is dissident republicans operating within the city."

'No cause'

DUP assembly member Willie Hay said he feared the discovery was a sign that dissident activity is on the increase.

"If you look at all the activities of dissident republicans, not only in this city but across the north west, there is a growing fear among the entire community that dissident republicans feel they should carry on their so called war and that is a genuine fear," he said.

The SDLP congratulated the police on the discovery and added it was time for dissident republican violence to stop.

Councillor Pat Ramsey appealed to anyone who had influence over those responsible to urge them to stop

"You are fulfilling no cause in this bombing campaign and it has to stop," he said.

Meanwhile the police say 19 petrol bombs were fired at the security forces during Monday's operation.

Security Minister Jane Kennedy said the mortar and launcher tube were meant to maim and kill.

Ms Kennedy said those responsible were opposed to the peace process.

"It's important to remember these people are enemies of the peace process.

"But we are determined they will not succeed and we are determined to face them down."

"Measures which take these weapons of destruction out of use should be welcomed."