The bomb was discovered in a hedge beside the road, with a command wire running to a firing point across the border in the Republic.
There is speculation that a small republican splinter group was behind a bomb left close to the the Irish border in south Armagh.
The 600lb bomb was made safe by an Army bomb disposal team near Forkhill.
BBC Ireland correspondent Mark Simpson said the bomb was thought to have been left by Oglaigh na hEireann, rather than the Real IRA or Continuity IRA.
He said: "A breakaway from a breakaway, if you like. It is hard for security services to keep tabs on them."
Our correspondent said the discovery of the bomb was the most serious incident involving dissident republicans since the killing of two British soldiers and a police officer in March.
He said the most "worrying aspect for police" was the size of the bomb and that "even by Northern Ireland's grim standards, 600lb is a big device".
"It shows what the dissidents are capable of producing," he added.
"But at the same time the fact that the attack failed shows they lack the 'expertise' the IRA used to have during the Troubles.
"What is more, even in hardline republican areas like south Armagh they lack significant public support."
He said the question now was what forensic evidence had been left on the bomb
The device had a command wire running from where it was left in Northern Ireland to a firing point across the border in the Republic.
Police said it could have had a "devastating outcome".
Police said it could have had a devastating outcome
"The actions of terrorist criminals in planting this device in the Forkhill area put local people and police officers at significant risk," Chief Inspector Sam Cordner said.
"Their actions were reckless and dangerous in the extreme. Their target may have been the police, but they did not care who they killed or injured.
The remains of the device, which contained fertiliser-based homemade explosives, have been removed for further examination.
The alert in the area began last Tuesday following a telephoned warning to a newspaper.
In January, a 300lb bomb was defused in Castlewellan, County Down.
It is thought the bomb was planted by dissident republicans who were trying to target the Ballykinler army base.
In May the component parts of another fertiliser bomb were found near Rosslea in County Fermanagh.
About 100lbs of explosives were found in a field near the Donagh to Rosslea Road.