Witnesses reported seeing passengers with facial burns and hair coming off at Parsons Green station and seeing a fire or hearing an explosion on the train.
Police said "a number of people" were injured as Prime Minister Theresa May's office said she would be chairing an emergency cabinet meeting later on Friday.
Emergency services said they were called at around 8:20 am (0720 GMT).
"Terrorist incident declared at Parsons Green Underground Station," police said in a statement.
"It is too early to confirm the cause of the fire, which will be subject to the investigation that is now underway by the Met's Counter Terrorism Command," it said.
Twitter user @Rrigs, who posted pictures of a white bucket smouldering on the train, said: "Explosion on Parsons Green District Line train. Fireball flew down carriage and we just jumped out open door".
The bucket looked like the type used by builders and there appeared to be cables coming out of it.
The station was closed, as well as an entire section of the District Line where it is located and police urged people to stay away from the area.
A Metro.co.uk reporter at the scene was quoted by the paper as saying that some passengers were "really badly burned" and their "hair was coming off".
The incident would be the fifth terror attack in six months in Britain since March, when a lone attacker mowed down pedestrians and stabbed a police officer outside the British parliament.
British Foreign Secretary Boris Johnson, a former London mayor, appealed for calm.
"Obviously, everybody should keep calm and go about their lives in a normal way, as normal as they possibly can," he told Sky News.
'Covered in blood'
Passengers described chaotic scenes at the station in a leafy and normally quiet part of west London.
"I saw two women being treated by ambulance crews," he said.
BBC correspondent Riz Lateef, who was on her way to work, said: "People were left with cuts and grazes from trying to flee the scene. There was lots of panic."
One passenger, named only as Lucas, told BBC 5 Live radio: "I heard a really loud explosion".
"I saw people with minor injuries, burnings to the face, arms, legs, multiple casualties," he said.
Another witness, Sham, told the radio station he had seen a man with blood all over his face.
"There were a lot of people limping and covered in blood," he said.
Nicole Linnell, 29, who works for a fashion label, said: "We saw people running down the tracks. About 30 or 40 people.
"They were running down the tracks outside our train," she told the Press Association.
"It was absolutely terrifying".
Natasha Wills, assistant director of operations at London Ambulance Service said: "Our initial priority is to assess the level and nature of injuries".
She said the ambulance service had sent "multiple resources" to the station, including a hazardous area response team.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)