Dissident republicans said they left the device found at the waterworks on the Castleblayney Road in Keady.

The alarm had been raised following a number of calls - reported to be from the Continuity IRA - claiming they had left a bomb in the area.

It confirms that the level of threat from republican groups in south Armagh is still very high Danny Kennedy Ulster Unionist

A search uncovered a device inside a refuse bin.

It was made up of a canister of petrol and a gas cylinder.

Newry and Armagh Ulster Unionist assembly member Danny Kennedy said it showed the threat still posed by terrorists.

"I think it is a matter of grave concern," he said.

"It confirms that the level of threat from republican groups in south Armagh is still very high and their capability cannot be overlooked or underestimated."

A police spokesman described it as "a reckless and life threatening act" which could have caused considerable damage.