Five men were last night being questioned in connection with the find.
Understood to have been acting on a tip-off, gardaí left the courthouse at 1.05pm and stopped and searched a 2001 silver Ford Focus estate vehicle.
Gardaí found the device on the front passenger side of the car, in which a group of men were travelling along Catherine Street.
More than 100 people in the courthouse were told to vacate the building and hundreds more, including residents, office workers and pedestrians on Catherine Street and nearby Beau Street, were also evacuated.
Meanwhile, firefighters and fire tenders were quickly relocated to the Lombard Street car park nearby.
The 200-metre section of Catherine Street, from the junction at the Mall to the courthouse entrance at the Waterside, along with the entrances to Beau St and Symes’ Lane, were cordoned off.
Reports said the car had “just left the courthouse” before it was stopped and searched. Gardaí could not confirm if the device was inside the car while it was on the grounds of the courthouse, nor could they confirm how long it was there.
The Garda Press Office said “five men in their mid-20s” were arrested and were being questioned at Garda stations in Waterford city and Tramore.
Defence forces spokesman Captain Pat O’Connor said: “Following a request from gardaí in Waterford, the EOD [explosive ordinance disposal] team was dispatched to the Catherine Street area.
“After arriving on-scene, they found an improvised, explosive device, which was dismantled on-scene,” added Capt O’Connor.
The device was declared safe at 5pm and the remains handed over to gardaí.
A witness said: “When the court broke for lunch at one o’clock, there was a car, a hatchback, stopped.
“The guards opened the boot and there was kids’ stuff in it but the boot was empty other than that.
“There were some men in the car — we thought it was a routine search — there was a lot of commotion going on,” added the source.
On Friday evening, the EOD team was called in to dismantle two “crude homemade viable” explosive devices found on a road adjacent to a halting site for Travellers at Bilberry.
* Anyone with information on either of these incidents can contact gardaí in Waterford on 051 305300.