Witnesses described people running in fear after hearing the 'bang' around 9am at the central London tube station.
The incident happened due to a 'faulty' Central Line train and emergency services were called to the scene.
An evacuation was ordered with a tannoy repeatedly stating: 'Would Inspector Sands please go to the operations room immediately' – the code phrase to alert staff that there is an emergency.
It comes just four days after two people were taken to hospital following a fire on a train at Oxford Circus. 'All of a sudden everyone came running out saying 'they've evacuated the station'.
'You don't know if it's terrorist-related. You're just like 'oh my God, get out of here'. There was panic down there. People were screaming,' he said.
A member of staff outside the station said there had been a problem with a train and emergency services were investigating.
A spokesman for the London Fire Brigade told MailOnline that the incident was caused due to 'an overheated compressor underneath a carriage on the train'.
Two fire engines, a police van and an emergency response unit were parked outside the station.
Passenger Sarah Marshall told The Telegraphs : 'There was smoke at one end of the station, a high pitched bang and a smell.
'Lots of people ran but others encouraged people to walk and situation was calm. I was towards back of crowd.'
Nigel Holness, London Underground's Director of Network Operations said: 'At around 9.10am our staff were alerted to reports of smoke under a Central line train at Holborn.
'Our staff immediately contacted the emergency services, who attended and investigated the incident. The cause of the smoke was a fault on one of our trains and it has now been taken out of service.
'I apologise for the concern this would have caused our customers at Holborn this morning and for the disruption. The station reopened at around 10.05am and trains have been stopping there since.'
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