The Home Secretary said the Joint Terrorism Analysis Centre (JTAC), which determines the terror threat level, had decided that "sufficient progress" has been made in the Parsons Green investigation to lower the threat.
Home Secretary Amber Rudd said the police had made "good progress" in the investigation as she announced the country had been removed from the highest terror alert.
"Severe" means a terrorist attack is thought to be highly likely, whereas "critical" suggests it is imminent.
London police say a second man has been arrested in connection with the London subway attack.
The 21-year-old was detained in Hounslow, west London at around 11.50pm on Saturday.
Two men are now in custody for possible roles in the bombing attack on a rush-hour subway train Friday that injured 29 people in London.
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Police have not provided details about the extensive search, which began two hours after an 18-year-old suspect in the subway bombing was arrested at Dover's ferry port. He is being questioned at a south London police station but has not been charged or identified.
Some passengers suffered burns and others were hurt in a stampede to escape.
She added there was "no evidence" to back up Islamic State's claim there were more "live" explosive devices.
Police said they are searching a residential address in Stanwell, Surrey, in conjunction with this arrest.
Ms Rudd also directly criticised Donald Trump over his claim the bombers were known to Scotland Yard. Soldiers and armed police were deployed to strategic locations such as nuclear power plants.