The package, delivered to a nearby pharmacy, contained a "cylindrical object with cables, batteries, and nails".
Police are "currently deployed to central Potsdam because a suspicious package [was found there]", the local police department said in a Twitter post. Police were called and the area was evacuated.
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Brandenburg state's top security official, Interior Minister Karl-Heinz Schroeter, said it also held a large firecracker without a fuse, Germany's dpa news agency reported on Friday night. He said it is not clear whether the package was a real weapon.
Both the market and the surrounding area have been evacuated as special forces investigate. The incident left 12 people dead and dozens more injured.
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Police are beefing up their presence at Christmas markets across Germany.
Potsdam, a small but historic city, is the capital of Brandenburg state.
Christmas markets are extremely popular in Germany and have increased security this year following the deadly truck attack at a market in downtown Berlin last December. It lies about 40 kilometers southwest of Berlin.
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