One rail was severely bent, but there were no immediate reports of injuries at the scene in southern County Armagh, three miles south of Newry in Northern Ireland.
Police said the blast followed anonymous telephone calls to Belfast media outlets warning of a bomb on the railway line.
The IRA, which called a cease-fire in 1997, had frequently attacked the rail line in south Armagh.
"At this stage, its too soon to be definitive, but we would assess that this was the work of dissident republicans," Chief Constable Sir Ronnie Flanagan told a news conference.
"We've known for some time it has been the intention of dissident republicans in that area to carry out attacks," Flanagan said.
Residents reported hearing an explosion at about 2:25 a.m., according to Northern Ireland's police force, the Royal Ulster Constabulary.
Police closed part of the rail line between Belfast and Dublin after the blast, and rail passengers were being taken by bus.