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Army bomb experts are examining a white van which was abandoned outside Aughnacloy PSNI station at Dungannon Road on Thursday at 2210 BST.
Police said about 350 people were asked to leave their homes and spent the night in three halls.
Some roads around the village remain cordoned off in the security operation.
The main street in Aughnacloy is now partially open and the A5 is accessible, however the main Aughnacloy to Dungannon road is closed.
The alert was raised in a telephone warning to a Belfast newspaper office. It is believed the call was from dissident republicans and the caller used a recognised code word.
Dissidents have been responsible for a series of bomb attacks on police stations and other buildings in recent months.
DUP councillor Sammy Brush said: "There is nothing getting in, or out, of the vicinity of the police station.
"There's a white Ford transit van parked in front of the police station."
"Residents were moved from Sidney Crescent and Dungannon Road.
"Evidently, this was quite a large bomb. I understand it was a viable device. Had it gone off, it would have caused serious destruction and death," he said.
Mr Brush said only an hour's warning was given and it was difficult, in that time frame, to get elderly people and young children out of bed and out of their homes.
He said the evacuation seemed "fairly well organised" and that there was "no panic".
"There's a little bit of anger and disbelief but I suppose the longer this goes on, the feelings will probably get stronger."