A terror attack is no longer imminent, say experts
MI5 and the Joint Terrorism Analysis Centre (JTAC) said an attack was no longer expected imminently.
The move comes after eight migrants with NHS links were arrested over the London and Glasgow failed bomb attacks.
Earlier, more background checks on migrant workers were announced by Prime Minister Gordon Brown.
The threat level was reduced after the first phase of the investigation - rounding up suspects - drew to a close. It indicates that the manhunt is over, says BBC correspondent Daniel Sandford.
The reduced level is likely to mean a slight reduction in security procedures and controls.
THREAT LEVELS Critical - an attack is expected imminently Severe - an attack is highly likely Substantial - an attack is a strong possibility Moderate - an attack is possible but not likely Low - an attack is unlikely Source: Home Office
Timeline: Failed bomb attacks Who are the suspects?
Ms Smith said although there was no intelligence to suggest another attack was imminent, it did not mean the overall threat had disappeared, and she urged the public to remain vigilant.
In his first question time as prime minister, Mr Brown ordered an urgent review of NHS recruitment. The suspects have links to the health service, with some working in hospitals as doctors.
Mr Brown said it was "vitally important that the message is sent out to the rest of the world that we will stand strong, steadfast and united in the face of terror".
The new terrorism minister Sir Alan West will carry out the review of NHS recruitment.
'Recruiters' concern'
The Recruitment and Employment Confederation (REC), which represents the UK recruitment industry, said Mr Brown's call for more checks on highly-skilled migrants was a "step in the right direction".
Anne Fairweather, external relations manager for the trade body, said: "Recruiters have been concerned for some time that CRB checks do not necessarily cover offences committed outside of the UK.
"One way to tackle this complex issue is to be more stringent when issuing foreigners with permits to work in the UK."
She added: "Ultimately it is for the Border and Immigration Agency to decide whether it is appropriate for someone to work in the UK.
"Agencies and employers responsibility lies with checking that a candidate is suitable for the job."
Mr Brown also told the Commons that sponsors of skilled workers would be asked to provide background checks on them.
Among other measures, he also said a watch list of potential suspects would be expanded to warn authorities across the world, and the admissibility of intercept evidence in court would be reviewed.
New agreements will be signed with countries around the world to ensure a co-ordinated response to the terror threat.
On Saturday afternoon, a burning green Jeep Cherokee loaded with gas cylinders crashed into the doors of Glasgow airport.
The previous day two Mercedes containing petrol, gas cylinders and nails were found in central London.
ARRESTS TIMELINE 30 June Dr Kafeel Ahmed and Dr Bilal Abdulla arrested at Glasgow airport after burning car driven into doors of main terminal 30 June Dr Mohammed Asha, 26, and his wife Dana Asha, 27, arrested on the M6 near Sandbach, Cheshire 30 June/1 July Dr Sabeel Ahmed (brother of Kafeel), 26, arrested near Liverpool's Lime Street station 1 July A 28-year-old man and a 25-year-old man, thought to be medical students or doctors from Saudi Arabia, arrested in Paisley 2 July Dr Mohammed Haneef, 27, detained in Australia, and a second doctor is questioned 3 July Second doctor questioned in Australia is released without charge
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Seven of those arrested are believed to be doctors or medical students and one used to work as a laboratory technician.
Six are being questioned at London's Paddington Green police station.
The seventh remains in hospital after the Glasgow attack, and the eighth is still being questioned in Australia after his arrest at Brisbane Airport.
Meanwhile, Calor is writing to its 10,000 local retailers to remind them of its policy on the way it sells its gas, after reports that its canisters were used in the attacks.
New customers must fill in a form which asks for their name, address and other personal details when they get their first Calor gas canister.
'Kicking and punching'
A man who grappled with one of the suspects after he saw the attack at Glasgow airport has described how his leg was broken in two places in the tussle.
"One of the guys got out of the car and went for the police officer. I just ran over to help the police officer," said 40-year-old heating engineer Michael Kerr.
"I tried my best to get the guy. I tried punching and kicking him but punching him I fell back and broke my leg."
Mr Kerr, who also lost several teeth, told the BBC that he was no hero but just doing his duty.
Thames House, headquarters of MI5.
The United Kingdom's  (JTAC), a division of the security agency MI5, has now reduced the United Kingdom threat level from 'critical' to 'severe'.

Since the terrorist attacks in London and Glasgow the threat level in the United Kingdom was at 'critical' meaning an "attack was imminent", however the , , today announced the level was to be reduced.

She said, "There is no intelligence to suggest that an attack is expected imminently. However, the reduction of the threat level to severe does not mean the overall threat has gone away."

The MI5 website stated, "This means that future terrorist attacks are still highly likely, but no longer thought to be imminent. The decision has been made by JTAC based on a review of the latest intelligence."

This reduction comes after eight arrests were made in connection to the terror attacks.