A plot by dissident republican terrorists to launch a massive bomb attack in the run-up to Christmas has been foiled by a joint PSNI-Garda operation.
Officers from the two forces swooped on a house near the border and discovered it was being used to manufacture a home-made mix for a car bomb.
Last night two men and a woman, all from Dundalk, were being questioned by the PSNI.
Police believe the bomb was to have been used by members of the dissident group Oglaigh na hEireann (ONH) in an attack on a commercial centre, probably in Belfast, at the height of the Christmas shopping season.
Police moved in shortly after midnight following a surveillance operation on both sides of the border.
PSNI officers raided a house which had been rented by a teenage couple and discovered the bomb mix factory.
Inside the house they found a grinder, which they believe was being used to mix the ammonium nitrate fertiliser with sugar to pack the car bomb.
Two suspects, a 19-year-old man and 18-year-old woman, were arrested.
They are both originally from Dundalk but have been living in south Armagh. They were taken to the Antrim serious crime suite for questioning and were still in custody late last night.
Officers from the Garda's Special Branch, Emergency Response Unit and National Surveillance Unit took part in the operation, which led to a separate raid on a premises at Kilcurry, Dundalk, at around 1am and the arrest of a 43-year-old man from Dundalk.
He was being held for questioning last night at Drogheda Garda station under section 30 of the Offences Against the State Act and can be held without charge for up to three days.
Follow-up searches were carried out later by the PSNI in the Forkhill and Faughart areas while gardai stepped up their inquiries around Dundalk. A senior Garda anti-terrorist officer said last night: "This is a highly significant find and there is no doubt that the operation has thwarted a major terror attack that could have killed innocent people and created mayhem in a busy commercial area."
Both forces have stepped up their surveillance on terrorist suspects in the past couple of weeks because of the increased activity by the dissidents, who have targeting Belfast city centre in particular.
ONH claimed responsibility for the sports bag bomb that exploded in the city's busy Cathedral Quarter last Friday night, bringing havoc to the streets.