The driver was responding to a call for a fare at the Derrybeg estate in the city at around 9.30pm on Saturday when the men placed the suspicious device inside his vehicle.

The taxi was then abandoned by the worried driver in the Martins Lane area, sparking a security alert.

Ian Murtagh, owner of the taxi firm, said they tried to close the roads themselves and divert traffic until the PSNI arrived.

However, he said the police "failed to come for over an hour."

"We blocked the road with our vehicle and another passer-by was helpful enough to block the other side of the road."

He added: "We didn't know what to do with ourselves - people were in danger passing and people in houses were potentially in danger as well."

Mr Murtagh said the incident was "very concerning."

Some situations may have to be dealt with cautiously due to the significant threat from a small number of people who have shown their determination to kill police officers.

Area Commander Chief Inspector Anthony McNally

When police arrived, they evacuated around 20 homes and officially closed part of the road.

Army bomb experts carried out a controlled explosion and declared the device a hoax shortly before 3am on Sunday.

Evacuated residents were allowed back into their houses a short time later and the road was re-opened.

Police say that while they did not attend the scene immediately, they "worked as quickly as possible, planning and assessing, in order to ensure the safety of the community and the officers responding."

Area Commander Chief Inspector Anthony McNally said: "We in Newry are committed to investigating this security alert but we have an over-riding responsibility to protect and preserve life, and that includes the lives of the community and the lives of our own officers."

Chief Insp McNally has appealed for anyone with any information to come forward.

He added: "The PSNI would like to thank the Patrick Street Sports Centre and the Mourne Country Hotel, but most importantly the local residents of Martins Lane who showed such community spirit in dealing with this incident."

Dominic Bradley, Newry and Mourne SDLP MLA, told UTV the hijacking was "extremely worrying."

"The taxi driver was under the impression that the gas cylinder in his car was a bomb.

"He thought he had a bomb in his car that would explode at any time."

He added: "The day before a viable device was found quite close to this area at the Cloghgue roundabout."

Mr Bradley said he condemned both incidents.

He said the alerts had caused "great annoyance and inconvenience to the local community."

"People of Newry have had their fill of intimidation and violence in the past."