Britain's interior minister said on Monday the country's terrorism threat level had been raised from "substantial" to "severe", the second-highest level, meaning an attack is highly likely, following Sunday's deadly blast in Liverpool.

"The Joint Terror Analysis Center are now increasing the United Kingdom's threat level from substantial to severe," she told British media, referring to the security services' unit responsible for setting the level.

The explosion outside Liverpool Women's Hospital on Remembrance Sunday has been declared a terror incident by British police on Monday.

The motive behind the attack, which ended in one fatality, remains unclear as Britain's Counter Terrorism Police lead an investigation into the case involving a taxi explosion, alongside MI5 intelligence agency.

A fourth suspect has been arrested as part of the ongoing investigation as the Head of Counter Terrorism Policing North West, Russ Jackson, said the taxi passenger appeared to have made an "improvised explosive device" which caused the blast.

The fare a man had asked to be taken to Liverpool Women's Hospital, which was about 10 minutes away, Jackson told reporters.

As the taxi approached the drop-off point at the hospital an explosion occurred from within the car. This quickly engulfed it in flames. Remarkably the taxi driver escaped from the cab, he said.

Earlier, three male suspects aged between 21 and 29 were arrested under the Terrorism Act following the car explosion outside the women's hospital.

A male passenger of the car was declared dead at the scene outside the hospital and is yet to be formally identified. The local Merseyside Police said the driver of the taxi was taken to hospital where he was treated for his injuries, which are not seen as life threatening, and has since been discharged.

"Detectives from Counter Terrorism Police North West continue to keep an open mind about the cause of the explosion and are working closely with colleagues at Merseyside Police as the investigation continues at pace," the force said in a statement.

"So far we understand that the car involved was a taxi which pulled up at the hospital shortly before the explosion occurred," the police statement said.

The incident took place around the time the UK fell silent for two minutes to mark Remembrance Sunday marked annually on the second Sunday of November, to commemorate the contribution of British and Commonwealth military and civilian servicemen and women in the two World Wars and later conflicts.

British Prime Minister Boris Johnson and Home Secretary Priti Patel issued statements on Twitter in the wake of the explosion.

"My thoughts are with all those affected by the awful incident in Liverpool today. I want to thank the emergency services for their quick response and professionalism, and the police for their ongoing work on the investigation," Johnson said.

Our police and emergency services are working hard to establish what happened and it is right they are given the time and space to do so, Patel said.

In February, the UK's terror threat level was lowered from severe to substantial , which indicates that instead of an attack being highly likely they are now categorised as likely .

Images available online showed a car on fire and later burnt out. Phil Garrigan, chief fire officer of Merseyside Fire and Rescue Service, said the blaze was "fully developed" when his crews arrived and that the injured driver had escaped before it took hold.

"Staff from Mersey Fire and Rescue Service have been working throughout the day and were at the scene within a matter of minutes, Garrigan said.

We will be continuing our partnership with Merseyside Police and Liverpool city council by providing visible reassurance to communities affected and will be knocking on doors to speak to people in the area and check their welfare," he said.

Soon after the explosion, armed police raided several terraced houses in Sutcliffe Street in Liverpool, north-west England, where the three arrests were made. Sections of Sutcliffe Street and Boaler Street remain cordoned off, with a heavy police presence at the scene as inquiries continue.

Chief Constable Serena Kennedy, of Merseyside Police, sought to reassure the public, saying events of this nature were very rare and that there would be an increased and visible police presence on the streets in the coming days.

It is also important that, at this very early stage, people do not speculate about what has happened. We will endeavour to update our communities as soon as we are able, she said.

Liverpool Women's Hospital said visiting access had been restricted until further notice and patients had been diverted to other hospitals where possible. The hospital receives around 50,000 patients annually as one of the largest hospitals of its kind in Europe.

(With inputs from PTI)