Police said a suspect device had been found in the Rossnagalliagh area. Army bomb experts and police have now left the scene.
Rainbow Child and Family Centre was evacuated and a number of roads were closed.
Templemore Sports Complex was also opened for those affected.
PSNI Ch Insp Gordon McCalmont told BBC Radio Foyle: "I've just been told that this was an elaborate hoax.
"It wasn't a viable device but somebody has gone to great lengths to make us believe that something viable was there.
"We will be launching a criminal investigation. We are quite confident that things will be wrapped up pretty quickly."
Police have said a security alert, which closed a day care centre in Londonderry, was an "elaborate hoax".