A suspicious object which had been placed on a wall close to a number of houses was discovered by a resident at around 8.30am.
The object was examined by police and ATO and was found to be a viable mortar type device.
The device was made safe and was removed for further examination.
Chief Constable Simon Byrne said the device as a “callous bid to kill or maim” police officers.
A 33-year-old man was arrested early on Sunday under section 41 of the Terrorist Act and is currently being questioned at the Serious Crime Custody Suite in Belfast.
Detective Inspector Andrew Hamlin said: “It is our view that that this device was placed in order to attack police officers at the nearby police station but it had the capacity to kill or seriously injure anyone in the vicinity.
“This is not the first time a deadly device has been left in a public space recently and serves to remind us all how little the terrorists responsible care for the lives of local people.
“At this time we are linking this incident to the hijacking of a delivery driver’s car in the Mount Sion area at around 9.40pm on Friday evening.
“A fake order was placed with a pizza outlet from a phone box on Bridge Street and when the driver arrived at the stated address, his orange coloured Fiat Sedici was taken from him by three men.
“I am keen to hear from anyone who saw the orange Fiat in the town or who noticed anything out of the ordinary in the Church View area on Friday night.
“Detectives can be contacted on 101 quoting reference number 371 07/09/19.
“We are continuing to conduct enquiries in the area today and this morning arrested a 33 year old man under terrorism legislation.
“He remains in police custody at present.”