Norwegian police have detonated an explosive device found outside a busy underground station in central Oslo.

Officers evacuated late-night bars and restaurants near the Groenland underground station as bomb disposal experts rushed to the scene.

Authorities later said the device was neutralised and a teenage Russian suspect arrested.

"The noise from the blast was louder than our explosives themselves would cause," a police spokesman said, while adding that further investigation would be conducted at the scene.

Police cordoned off a large area around a station after finding what they described as a 'bomb-like' device, in Oslo, Norway (AP)

The device had appeared to be capable of causing only a limited amount of damage, the police said earlier.

"Every restaurant was being closed," Malin Myrvold, who witnessed the scene from a fourth-storey window, told the Associated Press.

"You could see cops in heavy armour going in every store and restaurant.

"We were trying to see what was going on. The police were screaming at us to get back inside and stay where we were."

Norway's security service said a 17-year-old Russian citizen was arrested for explosives found at the subway.

The country's chief prosecutor said the bomb suspect was arrested on suspicion of handling explosives.

Security service head Benedicte Bjornland said it was unclear if the teen had plans to carry out an attack with the homemade device.

Mr Bjornland said intelligence services were aware of the youth, who is an asylum-seeker from Russia who arrived in Norway in 2010.

He also alleged the youth was part of "extreme Islamism" circles in Norway.

"It is likely that that attacks in France, German, Great Britain, Russia and Sweden can create a copycat effect in Norway with people with Islamic sympathies," Mr Bjornland added, listing of the locations of extremist attacks that have devastated Europe in the last year.

The Norwegian police force raised its national threat assessment after the discovery of the improvised explosive device.