The fake bomb was inadvertently left on the car and triggered a security alert when it tried to go through a routine check, Oslo police said in a statement.
Police, who had been criticised for reacting too slowly when gunman Anders Behring Breivik detonated a bomb in July last year before going on a killing rampage, cordoned off an area 500 metres (550 yards) around the embassy.
They also evacuated buildings, shut underground rail lines and brought in heavily armed special forces.
"Our bomb squad removed the object and found that it was a practice bomb which was previously used for an internal exercise at the embassy," the police statement said.
The U.S. Embassy declined to comment.
The embassy is planning to relocate due to security reasons to the outskirts of Oslo from its current location adjacent to the royal palace and near the foreign ministry.