The huge operation on Sunday in the southern city of Augsburg took 11 hours, involved 900 police officers and it ended successfully around 1800 GMT, local authorities announced.
The 1.8-tonne explosive was found on Tuesday during work at a construction site in the Bavarian city, but authorities waited until Sunday to coordinate the logistics necessary to make it safe.
More than 70 years after the end of the war, unexploded bombs are regularly found buried on German land, legacies of the intense bombing campaigns by the Allied forces against Nazi Germany.
Augsburg, the third-largest city in Bavaria, was targeted several times during the war.
A 1,500-metre exclusion zone was created for the operation in case the bomb exploded while engineers were trying to deactivate it and sandbags were set up all around.
Two experts defused the explosive, which was described as a "mega bomb" according to police spokesman Manfred Gottschalk cited by DPA news agency.
Police checked house by house to ensure they were clear of residents before giving the go ahead.
The effort to defuse the bomb only started around 1400 GMT due to a larger than expected number of bedridden or disabled people that had to be removed from the area, said Augsburg mayor Kurt Gribl.
About 100 buses and trams were deployed for the evacuation.
He had earlier urged "everyone concerned to leave the area, if possible by themselves," in a video message posted on the city's Twitter account.
Gribi also called for "each person to verify that their relatives, parents and friends have found places to stay outside the (security) zone... Look out for one another."
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All clear given
But pictures later showed the bomb disposal team calmly standing around the cylinder shaped bomb, around two metres long, smiling after their task had ended.
Citizens were then given the all clear to return to their homes.
Emergency shelters had been set up in schools and gymnasiums to handle those displaced, especially the elderly who had been unable to find accommodation at relatives or friends.
Ambulances were called in to transport the infirm to a safe location.
Admittedly this was an unusual Christmas day in Augsburg, a city spokesman told TV channel n24, adding that hopefully people would voluntarily leave their homes given the expected "force of the explosion" that could occur during the defusing of the bomb.
Bombs are often found during digging work at construction sites.
German authorities estimate there are 3,000 sunken bombs in the Berlin area alone.
The biggest previous evacuation caused by the dismantling of an unexploded bomb in Germany took place in December 2011 in Koblenz, in the west of the country.
Some 45,000 people had to leave their homes on that occasion.
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