Residents of Claremont Street in Armley have been asked to leave their homes while a search of the area takes place.
Officers have located the package, which residents say was found in an alleyway behind the terraced properties.
An army bomb disposal unit is likely to be sent to the scene as a precaution.
Witness Lewis Spry said:
"I came out of my house to see a police car at the end of Claremont Street; I live on Claremont Place. I saw the street was blocked off fully and police were knocking on all the doors. A resident of that street said a suspicious package was found in one of the bin alleys.
"I've lived in Armley for about a month, and I've found it is a very unsafe place to live."