The Northern Ireland Fire and Rescue Service was called and up to 21 patients were moved to another area of the hospital.
The Western Health Trust said the patients were removed safely and added it was hoped the hospital would return to normal later on Thursday.
The alarm was raised at 07:00 GMT.
A statement from the Western Trust said: "Smoke was reported coming from a 'bed pan washer' in Ward 5 at Altnagelvin Hospital this morning.
"Twenty-one patients were safely transferred from the ward and have been resettled elsewhere within the hospital.
"It is envisaged that the ward will return to normal business later today.
"The Western Trust would like to thank its staff and the emergency services for their prompt response to the incident."
Part of Altnagelvin hospital in Londonderry has been evacuated after smoke was discovered in one of the wards.