Shortly before, agents had ordered evacuation of area after detecting presence of a package.
Police described the contents of the package as a "cylindrical object with cables, batteries and nails", but no triggering device.
Police evacuated a large area of Potsdam's old town center on Friday, including parts of the market, and closed stores while they investigated the package, which had been delivered to a pharmacy.
German police say a suspicious item found at a Christmas market in Potsdam has been confirmed to contain explosives.
German police later confirmed the package contained explosives.
Brandenburg state Interior Minister Karl-Heinz Schröter told reporters a powder found in the device is undergoing tests to determine whether it was explosive. It didn't appear to have a detonator, police tweeted, suggesting the device was a "dummy" or assembled improperly, according to German media Deutsche Welle.
A year ago, a terrorist wrecked a truck one of Berlin markets and killed 12 people.
The number of police officers and private guards has multiplied in Christmas markets, which opened last week in Germany.
The package was dropped off by a messenger service in the afternoon at a chemist in the Brandenburg state capital just as crowds were gathering at the nearby Christmas market.