Security sources and locals said the bomb was defused in a mobile phone shop close to a petrol station on Sultana Street in the southwest of the city.
The Saudi sponsored Al-Arabiya television channel said security forces had thwarted a bomb attack on an electricity distribution unit in the area.
The Saudi daily al-Riyadh, quoting witnesses, said police had found the grenade inside the power supply box of a building.
"One of the residents of an adjacent building suspected the box so the police came and evacuated the whole block until they removed the grenade," said the newspaper, which has close ties to the government.
Police sealed off the area around 19:00 GMT on Sunday before removing the bomb, residents said.
Security forces also searched the al-Suaidi area which has seen several hunts for armed dissidents in the last few months.
Saudi Ibrahim al-Rayis, who figured on a list of 26 wanted "terror" suspects issued by the government, was killed in a clash with security forces in al-Sueidi on 8 December.
Saudi authorities have stepped up the hunt for dissidents fearing further attacks such as those that devastated residential compounds in Riyadh in May and November killing 52 people.
"One of the residents of an adjacent building suspected the box so the police came and evacuated the whole block until they removed the grenade"
The bomb discovery came close on the heels of terror threats which prompted British Airways (BA) to cancel flights to the country.
However, Interior Minister Prince Nayif bin Abd al-Aziz Al Saud said the country knew nothing of the flight scare.
"Although the channels... between BA and us are open, they did not tell us about anything related to planes," Prince Nayif said, despite a statement from British Airways that the Department of Transport was working closely with Saudi authorities.
BA cancelled Saturday afternoon's flight BA263 from London to the Saudi capital due to security concerns. Sunday's return flight was also cancelled.
Saudi authorities have arrested hundreds of dissidents, presumed to be sympathisers of al-Qaida chief Osama bin Ladin.
Several others have been killed in shootouts with security forces that also left several policemen dead.
Along with the sweep, Saudi leaders have also been stressing the need to combat what they call the "deviant" thinking that has led extremists to carry out the acts under an Islamic banner.