The Citroen Berlingo van had its roof cut back and the bombs were ready to fire - officers believe the intended target was a local police station.
Three men have been arrested following the discovery on Sunday night in the Letterkenny Road area, close to the border with Co Donegal, as around 100 homes were evacuated. Police are linking the find to dissident republican terrorist activity.
PSNI commander Chief Superintendent Stephen Cargin said he believed that terrorists were just about to launch the attack, probably on one of the police stations in Derry.
Two men - aged 37 and 35 - were detained at around 8.15pm. One of the men was the driver of the van which had a Republic of Ireland registration plate, while another man detained was on a motorcycle travelling directly behind the van.
A third man, 37, was arrested by detectives following the search of a property. A PSNI spokesman said that they have all been taken to Antrim Serious Crime suite to be questioned.
It’s only thanks to the highly effective action by the PSNI that we haven’t seen a huge tragedy unfolding in Derry/Londonderry with mass casualties and deaths of police officers, families and children.
NI Secretary of State Theresa Villiers
"It was a reckless attack. They were prepared to drive through a built-up area of the city to carry out this attack and cause mass fatalities," Chief Supt Cargin said.
"These devices were primed. They are crude home-made devices and there is no way people who made these bombs would be certain they would have hit their target.
"There would have been mass murder of police, and serious damage to property. Good police work prevented this."
He added: "If these devices had not been intercepted, we would have been looking at a completely different picture. It is a very worrying development.
"Dissident republicans want to take us back to a place no-one wants to go to."
Police have issued an appeal to anyone who may have noticed the white Citroen Berlingo van, registration number 99D 88526 and a black Honda CBR motorcycle, registration number LIB 3341 in area at the time to contact them.
Sinn Féin deputy First Minister Martin McGuinness said: "Last night, the PSNI intercepted what was clearly an attempt to launch a mortar bomb attack on one of the local PSNI stations.
"It was through their good work that we are not talking about a disastrous situation in Derry.
"Whatever differences may exist between the parties in Stormont, we are all absolutely united in our efforts to stand up against violent attempts to undermine the political progress already made - be they from loyalist flag protesters or those involved in incidents like last night."
The Secretary of State for Northern Ireland, Theresa Villiers, has branded the attack a "grim reminder" of how severe the terrorist threat continues to be in Northern Ireland.
"The people responsible are small in number and enjoy almost no public support, but they have lethal intent," she said.
"The UK Government takes this threat very seriously. It is a tier one priority in our national security strategy. And we give our absolute and unqualified support to the PSNI in their efforts to counter the threat from terrorism."
She added: "The reality is that the Belfast Agreement has transformed Northern Ireland. People can now live their lives with a freedom from fear which would have been impossible during the Troubles.
"But there continues to be very significant social sectarian divisions which terrorists and paramilitaries seek to capitalise on."
We can easily see the contrast between those who are reckless about the impact they have on the community and those who are seeking to protect them from harm.
Justice Minister David Ford
Justice Minister David Ford said that excellent police work in Derry had undoubtedly prevented a terrorist attack, which could have led to widespread injury and destruction.
"For the second time in less than a week the PSNI has removed deadly materials from our streets. Clearly, the intention in Derry was to launch an attack which could have resulted in multiple casualties," he said.
East Londonderry DUP MP Gregory Campbell said: "We were 10 minutes away from a disaster. That is how close we were to a really bad night in Londonderry.
"The mortars were ready to be fired. There could have been dozens of people killed."
Security chiefs were obviously working on good intelligence and had mounted a surveillance operation to foil the attack, he added.
SDLP Foyle MLA Pat Ramsey has also praised the police operation.
"If it wasn't for the swift actions of police officers then we could be waking up to devastating news," he said.
Mr Ramsey, who attended the scene of the security alert in the Brandywell area on Sunday night, said he believed that the PSNI rammed the vehicle.
"The fact that the van's roof had been cut back shows that there was real intent to use these devices to cause serious injury or death.
"I am dismayed that dissident republicans continue to pursue activity which shows a ruthless disregard for human life. Any threat to those people who work to uphold the rule of law is totally abhorrent.
"This special year for Derry cannot be overshadowed by the reckless efforts of a delusional minority. People here deserve to live in a society free from violence and the threat of violence."
Mr Ramsey added that those responsible were "bringing nothing but distress and disruption" to the people of the city.
He also highlighted that a petrol bomb and a number of bricks were thrown at a police car on Foyle Road during the evacuation.
Police said the alert in the Letterkenny Road area is now over. Residents were allowed to return to their homes on Monday night, after all roads reopened.
The latest discovery comes less than a week after a military-grade RPG rocket launcher and accompanying warhead were found at a house in west Belfast.
The PSNI said, at the time, that the weapons showed the continuing intent of dissidents to kill.
Meanwhile, a haul of suspected dissident republican rocket launchers and explosives - thought to be en route to Northern Ireland - were intercepted by gardaí in Co Tipperary last month.