Traffic has been blocked from sections of the city’s Östermalm district while the bomb technicians from the police comb the area.
Police received a call at 12.19pm about a burning car outside the Saudi embassy.
A man was arrested in the area on suspicions of arson.
Sweden’s security police, Säpo, have also been called in to aid in the investigation.
“We’re working together with police authorities in Stockholm,” said Säpo spokesperson Patrik Peter to the TT news agency.
“Clearly, we’re doing what we can to help police in Stockholm and are looking at what we can do about the matter.
At 2.14pm, bomb technicians began examining the area for possible undetonated explosive devices which may have remained in the car.
As of mid-afternoon on Wednesday, the normally busy Valhallavägen remained closed for traffic in both directions between Odengatan and Danderydsgatan.
But by 3.18pm, traffic was once again flowing as technicians failed to turn up any additional explosives.
According to Stockholm police spokesperson Towe Hägg, the charred remains of the car have been confiscated by police for additional forensic analysis, as has one additional vehicle believed to be used by the suspect.
Hägg had no information about the age or identity of the man arrested following the fire.
“He hasn’t said anything while on the scene and will be interrogated during the evening,” she told TT.
It’s also unclear exactly what the motive for the fire may have been.
“There are no known threats against the embassy,” said Hägg.