Bomb disposal squad members stand outside Liverpool Women's Hospital in Liverpool, England, on Sunday. AP

A passenger carried an explosive device that blew up a taxi in the northern English city of Liverpool on Sunday on board and the blast is being treated as a terrorist incident, police said on Monday.

Police said they believed they knew the identity of the passenger, who was killed by the explosion, but could not disclose it.

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"Although the motivation for this incident is yet to be understood, given all the circumstances, it has been declared a terrorist incident and counter-terrorism policing are continuing with the investigation," said Assistant Chief Constable Russ Jackson of Counter-Terrorism Policing Northwest.

The taxi exploded outside Liverpool Women's Hospital, killing the passenger and injuring the driver who received medical treatment but has since been released.

Emergency services outside Liverpool Women's Hospital in Liverpool, England, on Sunday. AP

The man killed in the blast has not yet been identified, the statement said. The injured man, who was driving, was in a stable condition in hospital.

Police also cordoned off another residential street in the city. They did not disclose details of the operation.

Police were called to reports of a blast involving a taxi at Liverpool Women’s Hospital on Sunday morning. Photos showed a vehicle in flames near the hospital's main entrance.

Merseyside police, who cover Liverpool, said in a separate statement that while anti-terrorism police were leading the investigation, the blast has not yet been declared a terrorist incident.

Armed police officers at Sefton Park after an explosion at the Liverpool Women's Hospital in Liverpool. AP

They were keeping an open mind as to the cause of the blast, the force added.

"So far we understand that the car involved was a taxi which pulled up at the hospital shortly before the explosion occurred," said Merseyside police.

The male passenger of the car died and the driver was being treated for non life-threatening injuries, police said.

The explosion occurred just before 11am on Remembrance Sunday, the time people across Britain pause in memory of those killed in wars.

Police said the explosion had not been declared a terrorist attack and they were keeping an open mind about the cause, but counter-terrorism police were leading the investigation.

UK Home Secretary Priti Patel attends a session. File photo

Britain's interior minister, Home Secretary Priti Patel, said she was "being kept regularly updated on the awful incident.”

The Liverpool Women’s Hospital said it immediately restricted visiting access until further notice and diverted patients to other hospitals "where possible.”

Fire services said they extinguished the car fire rapidly, and a person had left the car before the fire "developed to the extent that it did.”