The Home Secretary said the Joint Terrorism Analysis Centre (JTAC), which determines the terror threat level, had decided that "sufficient progress" has been made in the Parsons Green investigation to lower the threat.
"Severe" means a terrorist attack is thought to be highly likely, whereas "critical" suggests it is imminent.
Following the bombing of a London tube train at Parsons Green station on Friday, the terror threat level was increased from severe to critical.
Of the 30 people injured in the bombing, all but one have been discharged from hospital.
British police are searching a home in the London suburb of Stanwell linked to the arrest of the second suspect in the subway bombing.
Just one person is being treated at Chelsea and Westminster Hospital, which has a specialist burns unit.
Ms Rudd today said that it seemed the Parsons Green bomber was not a lone wolf, but added: "It's too early to reach any final conclusions on that".
He reportedly "froze" as he was surrounded by cops at 7.50am yesterday after being tracked by facial recognition technology following the London Tube attack that injured 30.
Police are continuing to search a foster home in Sunbury-on-Thames, Surrey, in connection with the teenager's arrest on Saturday.
Ronald Jones, 88, and Penelope Jones, 71 were rewarded for their service to children by the Queen, who made them MBEs in 2010.
A friend, Alison Griffiths, said they are "great pillars of the community" who have taken in several hundred children in the last 40 years.
The whole road remains cordoned off and police have erected a large grey fence around the front of the Jones's home.
The 21-year-old man was arrested in Hounslow, west London, on Saturday night on suspicion of a terror offence and is in custody in south London. An 18-year-old man was arrested Saturday in Dover, where ferries leave for France.