"Based on what we know so far, it is clear that this was a terrorist plot aimed at murdering Americans in one of the busiest places in our country," Eric Holder, the US attorney-general, said in Washington.
Holder said Shahzad was talking to investigators, providing them with valuable information. A planned court hearing on Wednesday was cancelled in part because of his continuing co-operation.
The UK's Times Online reported that Aliou Niasse, a Senagalese Muslim immigrant who works as a street vendor on Times Square, was the first to bring the smoking car to the attention of police.
Shahzad, who became a naturalised US citizen last year, was arrested on Monday night after being taken off a plane that was about to fly from New York to Dubai.
The authorities had placed him on a "no-fly" list hours before his arrest, but the plane he was on had already taxied away from a gate at John F Kennedy airport and had to be ordered to turn around.
Janet Napolitano, the homeland security secretary, said that had the plane taken off there were powers "to order the plane to turn around and come back".
Chris Yates, a specialist in aviation security, told Al Jazeera that allowing Shahzad onto the flight was a security failure.
"There are supposedly systems in place that airlines can check to ensure that people boarding planes are not wanted for crimes.
"So this guy should not have been allowed ... to board the airplane. There are checks and balances in place but they didn't work."
The son of a retired Pakistani senior air force officer said he returned from Pakistan in February, telling an immigration official that he had been visiting his parents there for five months and had left his wife behind.
In Pakistan on Tuesday, intelligence officials said several people had been detained in connection with the case.
Al Jazeera's Kamal Hyder, reporting from Pakistan, said Shahzad's father-in-law was one of the five arrested in Karachi and Faisalabad.
His parents' house was located in Peshawar but apparently the parents left once they heard about their son's arrest, our correspondent said.
Kifyat Ali, the cousin of Shahzad's father, Baharul Haq, a retired air vice-marshal and deputy director general of the civil aviation authority, told reporters outside a two-storey home in an upscale part of Peshawar that the family had yet to be officially informed of Shahzad's arrest in the US.
|Prosecutors say Shahzad admitted to receiving explosives training in Pakistan [Orkut]
"This is a conspiracy so the [Americans] can bomb more Pashtuns," Ali said, referring to a major ethnic group in Peshawar and the nearby tribal areas of Pakistan and southwest Afghanistan.
Ali said Shahzad often stayed in Peshawar when he travelled from the US, and "was never linked to any political or religious party here".
In Bridgeport, Connecticut, investigators from the FBI searched Shahzad's home, removing bags of potential evidence.
Barack Obama, the US president, said "hundreds of lives" may have been saved on Saturday night by the quick action of ordinary citizens and law enforcement officials who raised the alarm about the 1993 Nissan Pathfinder rigged with a bomb made of petrol, propane and fireworks and parked on a bustling street in Times Square.
"As Americans and as a nation, we will not be terrorised. We will not cower in fear. We will not be intimidated," Obama said.
Michael Bloomberg, New York's mayor, warned against violence against Muslims in the city following the arrest.
"We will not tolerate any bias or backlash against Pakistani or Muslim New Yorkers," he said.