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The ship was found to be carrying 29 crates containing detonators and explosive materials including ammonium nitrate.
"The coastguard has deactivated a moving bomb," coastguard rear admiral Yiannis Sotiriou told reporters, according to state agency ANA.
Sotiriou added that the Tanzania-flagged freighter Andromeda, seized on January 6, was found to have dozens of structural issues and should not have been at sea.
"It could have had unpredictable consequences on people and the environment," he said.
The captain claimed to have been sailing to Djibouti but it later emerged that the actual destination was the Libyan port of Misrata.
The eight-man crew will be taken before a prosecutor on Thursday.