The threat to the UK from international terrorism was tonight raised from substantial to severe - meaning an attack is "highly likely".
Home Secretary Alan Johnson said although the threat had increased there was no intelligence to suggest an attack was imminent.
He said: "The Joint Terrorism Analysis Centre has today raised the threat to the UK from international terrorism from substantial to severe.
"This means that a terrorist attack is highly likely, but I should stress that there is no intelligence to suggest than an attack is imminent.
"JTAC keeps the threat level under constant review and makes its judgments based on a broad range of factors, including the intent and capabilities of international terrorist groups in the UK and overseas."
Mr Johnson added: "The highest security alert is critical and that means an attack is imminent, and we are not at that level."
He said more measures had been taken to protect aviation since the alleged failed bomb attack on a plane at Detroit at Christmas.
"We have a very adept and very focused counter-terrorism facility in this country and people should be reassured by that."
He said that moving to the different threat level meant people had to be more alert, but there was absolutely no intelligence to suggest that an attack was imminent.
Mr Johnson said that today's decision was not specifically linked to the Christmas Day plane bombing attempt or any other incident.
The Detroit incident has moved the focus of the fight against terror onto the Yemen, where suspect Umar Farouk Abdulmutallab has reportedly claimed he was supplied with explosives.
Following the attack, the Yemeni Government has stepped up a US-backed military operation against al Qaida sympathisers based in remote areas of the Middle Eastern country. And Prime Minister Gordon Brown has called an international counter-terrorism meeting on Yemen in London for January 27.
A security review conducted in the wake of the failed attack led to Mr Brown's announcement on Wednesday of new measures, including a suspension of direct flights between the UK and Yemen and a "no-fly list" to prevent people with suspected militant links from travelling to Britain.
Mr Johnson said: "We still face a real and serious threat to the UK from international terrorism, so I would urge the public to remain vigilant and carry on reporting suspicious events to the appropriate authorities and to support the police and security services in their continuing efforts to discover, track and disrupt terrorist activity."
Today's escalation of the threat level reverses a decision in July last year to downgrade the likelihood of a terror attack from "severe" to "substantial".
The Joint Terrorism Analysis Centre (JTAC), a unit within MI5, sets the level based on an analysis of intelligence. The assessment covers potential attacks by al Qaida or linked extremist groups.
There are five levels of threat, ranging from low - meaning an attack is unlikely, to critical - when an attack is expected imminently.
The threat level was first made public on August 1, 2006, when it was set at severe. It was raised to critical on August 10 that year after a series of arrests over an alleged plot to blow up transatlantic aircraft, but lowered to severe again the following week.
The threat level was last at critical in June 2007, following the attack on Glasgow Airport and the failed car bombings in central London.
The level is under constant review and can change quickly in response to events.
The threat from dissident Republican and Loyalist terrorists in Northern Ireland is assessed separately.