Police were in the process of evacuating around a thousand people from bars, eateries, residential accommodation, a theatre and a hotel in the bustling Cathedral Quarter district when the device exploded just before 7pm last night. No-one was injured in the blast.
Officers had been responding to a bomb warning phoned through to a Belfast newsroom.
But police said the caller wrongly claimed the device had been left at a hotel, when it was actually placed on the pavement beside a restaurant.
Dissident republicans opposed to the peace process have been widely blamed for the attack.
While police described the explosion as "small" they said the device still had the potential to inflict lethal injuries.
Police Service of Northern Ireland (PSNI) Chief Superintendent Alan McCrum said the perpetrators had been "totally reckless".
"This was an attack on the people of Belfast going about their normal lives on a busy night for socialising in the city," he said.
"This attack ruined the night out for these people. Those who carried out this attack have nothing to offer except disruption and destruction.
"Police would appeal for continued community support and vigilance on the run up to Christmas in seeking to disrupt or deter any further attack on the city."
Stormont's Justice Minister David Ford said the attack was an attempt to kill innocents while Northern Ireland Secretary Theresa Villiers branded it "deplorable".
Security has been ramped up in the city since a man was forced by masked dissidents to drive a car bomb to a shopping centre that faces a police station last month. That 60kg (132lb) device only partially exploded and no-one was injured.
"Yet again we see a reckless attempt to kill and injure innocent people in Belfast," Mr Ford said.
"The people carrying out these attacks have set out no reason and explained no cause for their acts of senseless violence. Their only aim seems to be to injure and disrupt. They ignore the strength of public support for normality and peace, especially at this Christmas season."
Ms Villiers said: "This was a reckless attack aimed at a busy entertainment area of the city.
"On one of busiest nights of the year with people enjoying the festivities ahead of Christmas, as well as all those in the final stages of Christmas shopping, it shows that these terrorists are stooping to a new low.
"This small minority want to drain the economic life from Belfast - but we will not let them succeed."
Police have urged the public, particularly business owners, to be on the look out for suspicious objects.
In November dissidents were also blamed when a bus driver in Londonderry was forced to drive a bomb to a police station in the city. She abandoned the vehicle before reaching the destination and the device did not explode.
While the threat posed by the violent extremists has remained classed as severe, police have acknowledged a "surge" in activity has taken place in recent weeks.
The area targeted last night is named after the landmark St Anne's Church of Ireland cathedral.
In a joint statement, senior church figures the Dean of Belfast Reverend John Mann and the Bishop of Connor Alan Abernethy said they were "profoundly saddened" at the attempt to "disrupt and endanger the people of Belfast".
Unionist and nationalist politicians heavily condemned the attack, as did representatives from the hospitality and business community.
The Belfast Chamber of Trade and Commerce, the Cathedral Quarter Trust and Pubs of Ulster were among organisations to speak out against the bombers.