Peter Clarke, head of Britain's anti-terror branch, told a news conference more than half a tonne of ammonium nitrate fertiliser was discovered in a two-metre high plastic bag in west London.
"Part of the investigation will focus on the purchase, storage and intended use of that material," Clarke said.
An anti-terror source said the fertiliser was similar to explosive materials used in bombings in Turkey and Saudi Arabia in recent months, although there was no evidence to indicate a bombing was planned or any possible target.
However the source said there was enough material to launch an attack on the same scale as the huge 1996 bombing near Canary Wharf in London's financial district.
Clarke stressed the operation was not linked to investigations into the coordinated train bombings in Madrid on 11 March, which killed nearly 200 people or to Irish republican terrorism.
"I should like to make it clear at this stage that this operation is not linked to either Irish republican terrorism or to the recent attack in Madrid."
But he added the "threat from terrorism is very real" and warned the public to remain "watchful and alert".
Arrested on suspicion
He said the eight men, all British and aged between 17 and 32, were arrested on suspicion of preparing to carry out acts of "terrorism". They were detained in a series of 24 dawn raids carried out by 700 officers from five police forces and the security services.
"It was the biggest counter-terrorism raid in recent years," the police source said. He added all the suspects were believed to be Muslim and of Pakistani origin.
"It was the biggest counter-terrorism raid in recent years"
Some were arrested near London's Heathrow and Gatwick airports, but the source said there was no evidence to suggest either were targets.
Two suspects were arrested in Uxbridge, also in west London, and three in Crawley, south of the capital. One was detained in Ilford, east London, another in Slough, west of London, and another in Horley, south of the capital.
Uxbridge and Slough are near Heathrow airport, while Crawley and Horley are near Gatwick airport.
Ammonium nitrate is a common fertiliser, but it can be mixed with fuel oil to make a powerful explosive. It was used in the 2002 blast in Bali that killed 192 people, mostly Western tourists, and in the Oklahoma City bomb at a US government building that killed more than 160 people in 1995.
The fertiliser is also commonly used in agriculture as a nitrogen fertiliser, in solid-fuel rocket propellants, in pyrotechnics, and in the production of nitrous oxide (laughing gas). It has been produced industrially since the 1930s.