Patong Police and Phuket Tourist Police were called to the scene, in front of the Hangout Phuket Lokal hotel, at 9:30am.
The area was sealed off while police inspected and safely recovered the device.
The device was found after a crane being used to carry out renovations to the front of the hotel accidentally bumped a tree, causing the device to fall to the ground, construction contractor Suwan Khamkom, 40, told the police.
The device was wrapped in plastic and bound with white tape, he added.
Seeing the device fall to the ground, workers at the site went to investigate. They saw the device and quickly informed hotel owner Parawee Karasek, 53, and the police.
EOD officers arrived and recovered the device, explained Maj Ekachai Siri of the Phuket Tourist Police.
Police are now questioning Ms Parawee at Patong Police Station in the hope of uncovering the origin of the device and the motive for placing it in the tree in front of the hotel.