Police found an "amateurish" but potentially powerful bomb that apparently began to detonate but did not explode in a car parked in New York's Times Square, authorities said today.

Thousands of tourists were cleared from the streets for 10 hours after two vendors alerted police to the suspicious vehicle, which contained three propane tanks, fireworks, two filled five-gallon petrol containers and two clocks with batteries, electrical wire and other components, Police Commissioner Raymond Kelly said.

"We avoided what could have been a very deadly event," Mayor Michael Bloomberg said. "It certainly could have exploded and had a pretty big fire and a decent amount of explosive impact."

The bomb appeared to be starting to detonate but malfunctioned, top police spokesman Paul Browne said. Firefighters and witnesses said they heard a popping sound from inside the vehicle.

Bloomberg called the explosive device "amateurish" but potentially deadly, noting: "We are very lucky."

The NYPD bomb squad "has seen sophisticated devices before and they described this one as crude", Browne said. "But it was nevertheless lethal."

If detonated properly, it could have created a large fireball and sprayed shrapnel that could have killed pedestrians in the immediate vicinity, Browne added.

"I think the intent was to cause a significant ball of fire," Kelly said.

No-one has been arrested, but Kelly said a surveillance video showed the car driving west on 45th Street before it was parked between Seventh and Eighth avenues. Police were looking for more video from office buildings that weren't open at the time.

Homeland Security Secretary Janet Napolitano said on NBC's Meet the Press that officials are treating the incident as a potential terrorist attack. The mayor said earlier today that "we have no idea who did this or why", but pointed out that the city is a frequent target of terrorism.

"These things invariably ... come back to New York," Bloomberg said.

A T-shirt vendor and a handbag seller alerted police at about 6.30pm (2230 GMT) yesterday - the height of dinner hour before theatregoers head to Saturday night shows.

Smoke was coming from the back of the dark-coloured Pathfinder, its hazard lights were on and "it was just sitting there", said Rallis Gialaboukis, 37, another vendor.

Duane Jackson, a 58-year-old handbag vendor, said he noticed the car at around 6.30pm and wondered who had left it there.

"That was my first thought: Who sat this car here?" Jackson said today.

Jackson said he looked in the car and saw keys in the ignition with 19 or 20 keys on a ring.

He said he alerted a passing mounted police officer.

"That's when the smoke started coming out and then we heard the little pop, pop, pop like firecrackers going out and that's when everybody scattered and ran back," he said.

"Now that I saw the propane tanks and the gasoline, what if that would have ignited?" Jackson said. "I'm less than 8ft away from the car. We dodged a bullet here."

He said he didn't think the car had been there for more than 10 or 15 minutes.

A white robotic police arm broke windows of the SUV to remove any explosive materials. A Connecticut license plate on the vehicle did not match up, Bloomberg said. Police interviewed the Connecticut car owner, who told them he had sent the plates to a nearby junkyard, Bloomberg said.

The SUV was towed early today to a forensic lab in Queens, where it was being "thoroughly checked for prints, hairs and fibres", Browne said. Napolitano said fingerprints had been recovered from the vehicle.

Heavily armed police and emergency vehicles shut down the city's busiest streets, choked with taxis and people on one of the first summer-like days of the year.

Part of a Marriott hotel was evacuated for hours, unnerving thousands of tourists attending Broadway shows, museums and other city sights.

President Barack Obama praised the quick response by the New York Police Department, White House spokesman Nick Shapiro said.

He has also directed his homeland security and counter-terrorism adviser John Brennan to advise New York officials that the federal government is prepared to provide support.