A number of homes have been evacuated and a section of road closed following the discovery of a suspicious object in Creggan.
Creggan Heights has been closed between Fanad Drive and the Rathmore roundabout.
The Corned Beef Tin in Central Drive has been opened for affected families.
The PSNI said: "Following the discovery of a suspicious object in the area of Creggan Heights today, and to ensure the safety of local residents, the decision has been taken to evacuate homes.
"We recognise the impact this will have on local residents and, in partnership with our colleagues in Council, the Corned Beef Tin in Central Drive has been opened as a rest centre.
"We also want to advise the community that Rathmore Roundabout to Fanad Drive is closed. Diversions are in place.
"Our priority is ensuring the safety of the community and we are grateful for your patience and understanding."
The suspicious object was discovered amid PSNI searches for bomb-making material, police have confirmed.
Up to 80 police officers have been involved in searches on Monday for bomb-making material police believe is being stored by the 'New IRA' in the Creggan area.