There were no reports of deaths, but six people were injured when a device in a maroon Ford Sierra exploded opposite a police station in the busy East End street shortly before 6pm.
Scotland Yard Deputy Assistant Commissioner Alan Fry, head of the anti- terrorist branch, said: "This is another vicious atrocity with terrorist impact. Early indications are that this is a similar device to that in Brixton. We are treating this as a racist offence." A 999 call was made by someone claiming to represent the neo-Nazi group Combat 18, who said it was responsible, he said.
One theory being investigated by police is that the driver of the vehicle, who was not seriously injured, had discovered the device and was taking it to a nearby police station when it exploded.
At the time of the blast, many local Muslims were gathering outside the East London Mosque for evening prayers. Brick Lane was thronged with shoppers and revellers enjoying a normal Saturday evening in one of London's famous restaurant centres.
Coming a week after the Brixton bomb, for which four neo-Nazi groups have claimed responsibility, and two months after the report of the Stephen Lawrence inquiry, this act will raise tensions between the white and black communities.
Yesterday afternoon, in Southall, west London, another area with a significant Asian population, a march was held to commemorate the 20th anniversary of the death of Blair Peach, who was killed during a demonstration against the National Front and who was involved with anti-Nazi activity in the Brick Lane area.
Oona King, the Labour MP for Bethnal Green, whose constituency includes Brick Lane, said: "This is symptomatic of the backlash against the Lawrence inquiry. This is the ugliest face of racism I have seen, but not entirely surprising, considering the racism faced by the black community up and down the country. The Lawrence report was a wake-up call." Brick Lane, often referred to as "Banglatown", was in the past the scene of confrontations between neo-Nazi groups and anti-racists. The attack took place as police in south London were staging a reconstruction of the Brixton market explosion.
Shopkeepers and Saturday-afternoon drinkers spoke of a blast which shook buildings and shattered glass at the junction of Brick Lane and Chicksand Street. Cois Chowdhury said he was just 10 yards away from the car when the bomb exploded. "I saw all bits of the car fly apart," he said. "Suddenly there was a big bright explosion and then flames, flames, flames."
Uddin Kamal, a tailor, aged 33, arrived on the scene after hearing the explosion: "This must be racist. I feel very bad. If anyone tries to kill me, I will kill them," he said. Schoolboy Shah Zaman, 15, from Stepney Green, said: "I want to know why they're doing this. What have they got against us?"
The Prime Minister, speaking from Washington in the US, where he was attending the Nato summit, said: "These things are outrageous and we will not tolerate them. We will make every effort to find those responsible and bring them to justice."
Community leaders spoke of their fears of repercussions. Abu Hasan, assistant secretary of the East London Mosque, said: "What we want to know is, do these sick people think about what they're doing? Ours is supposed to be a civilised society. This is like Bosnia. The BNP, Combat 18, are like Milosevic. It shouldn't be like this. We should work together."