A bomb squad has been called in to determine whether it is a genuine threat, while 2000 people are left stranded outside with major delays to flights expected.
All flights have been suspended, and approach roads to the main terminal building have been blocked, while police try to manage the security alert.
Passengers caught in the chaos have been told to check with their airline for updates on their flight's status, with nine flights that should have landed at London Luton Airport having been diverted to Stansted and a further two switched to Birmingham.
Gavin Harper, who had just landed at Luton airport when the alert began, said:
'We were in the baggage reclaim area at the time, we got off the plane at about 1.30pm.
'We were told it was a fire alarm, some people were saying we needed to move outside, we got outside and were progressively moved away from the building, further into the car park.
'The bomb squad turned up soon after, but everyone has remained pretty calm to be honest.'
In a 5pm update, Luton said: 'All flights have been suspended and the roads between Junction 10A of the M1, and leading up to the airport have been closed. The A1081 and London Road towards Luton town centre remain open to traffic travelling from the M1.
'We are advising passengers to contact their airlines for information about specific flights which are being diverted to airports in the London area and the Midlands.'
The incident comes just weeks after Britain raised its international terrorism alert to its second-highest level.
UPDATE: Police have confirmed the device was not a 'home-made bomb' as services at Luton airport return to normal.
Bedfordshire Police said: “We can confirm that controlled explosion has taken place at Luton Airport. Item is safe.
“Airport opening soon but there will be delays.”