After a member of the public found a device in a men's toilet rubbish bin shortly before 9am, police were alerted and the New Zealand Army bomb squad was dispatched from Christchurch.
About 320 airport staff and passengers were evacuated from the airport terminal, arriving travellers were turned away by police, and all outgoing flights cancelled.
One international traveller, Werner Fischer, said his plans were "completely ruined" by the delays.
He had been in Dunedin on business and was due to return home to Vienna. However, he was unable to fly to Auckland, so missed his connection to Bangkok.
Emma Williams, who had been visiting family in Dunedin for the past four weeks, was due to fly to Auckland yesterday before returning home to England tomorrow.
Travelling with husband Lee and 5-month-old daughter Alice, she had wanted to postpone their trip home because of the flight delays following the volcanic eruption in Iceland, but was told that would mean a month-long wait to get on another flight. The departure delay yesterday was a "bizarre" surprise.
"Who would have thought?" she said.
The New Zealand Symphony Orchestra was also caught up in the drama. After performing in Dunedin on Wednesday night, the orchestra was due to fly to Auckland to launch its 2011 European tour.
Blues musician John Mayall, who also performed in Dunedin on Wednesday night, took refuge in the nearby Mainland Air building.
"My only concern was that I was dressed in just a pair of shorts and sandals," he said.
He kept up his energy levels thanks to a packed sandwich and vacuum flask of tea, and hoped to reach Nelson in time for a gig last night.
While many passengers simply wanted to make it home, others were glad it was not raining, as they gathered in a car park, a safe distance from the terminal. Many said they would rather be safe than sorry.
Three incoming flights, not requiring an air traffic controller, were allowed to land some distance from the terminal. Passengers disembarked and the planes then left empty.
Air New Zealand Dunedin airport manager Alistair Bevin said four flights, to Auckland, Wellington and Christchurch, were cancelled because passengers could not be checked in.
Sergeant Martin Hepburn, officer in charge of the airport, said the hoax bomb consisted of a 750ml bottle filled with liquid, with wires coming from it, attached to two batteries, a circuit board and a wad of plastic-type material, all inside a toilet bag.
"Someone's gone to a bit of trouble," he said.
Senior Sergeant Steve Aitken, of Dunedin, said police would review CCTV footage and examine forensic evidence to identify the offender.
Two bomb experts arrived about noon, neutralised the bomb and cleared the site.
Police then undertook a search of the car park and terminal building to ensure no other suspicious items were present.
Wires were found in a rubbish bin in the main terminal, but the significance of them was yet to be determined.
When the terminal was reopened about 2pm, staff and passengers were enthusiastic to re-enter.
Mr Bevin said most of the affected passengers were accommodated with two extra flights to Christchurch, and on existing services. Others rebooked to travel today.
Flights were running on time last night.
He had no idea yesterday of the economic impact on the airline, but expected it to be "quite substantial".
Airport operations manager Richard Roberts said the "very elaborate hoax to cause maximum disruption" was "just disappointing" for the airport.
He was pleased with how security operated and believed all procedures were followed well.
A formal debrief would be held next month, he said.
