The incident, which happened at about 1pm, caused chaos in Otley after a nearby bus station was shut down due to the incident.
Traffic then backed up all around the bus station, causing delays to bus services and tailbacks for drivers, as police and the army bomb disposal team dealt with the offending item.
The hand grenade was found among donations to a charity shop in Boroughgate in Otley.
A cordon was put in place for the safety of the public, until the army bomb disposal team then turned up.
A spokesman for First West Yorkshire confirmed that several bus services were affected including the 34, 784, X84 and X85.
They added: "Otley Bus Station and surrounding roads closed due to a bomb scare. Delays expected due to traffic gridlock."
Later on Monday afternoon, the bus firm tweeted an update to the incident which said: "Police cordon around Otley Bus Station has been reduced and we can now access the bus station. Services revert to normal route. Delays are expected as Boroughgate is still closed."
The bomb disposal team arrived at 3pm and removed the item, which West Yorkshire Police confirmed was a 'harmless battlefield souvenir'.
The hand grenade was not live when it was disposed of, police confirmed.
A spokesman for the force said: "At 1pm today police received a report of a rusted hand grenade being found among donations to a charity shop in Boroughgate, Otley.
"A cordon was put in place for public safety pending the arrival of Army bomb disposal experts. They attended at 3pm and removed the item which was believed to be a harmless battlefield souvenir."
Keep following our daily news live blog for all the latest on this and other incidents as we get them.
Elsewhere in Leeds, police have launched an investigation into the unexplained deaths of a couple in the Halton area. The incident happened on Sunday but a police cordon remains in place. Our reporter was at the scene on Monday afternoon.
You can read more on that developing story here.
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