US officials said the alleged plotters were planning to use liquid explosives brought onboard in their hand luggage to blow up ten planes simultaneously as they flew over the Atlantic on route to the US.
US Homeland Security Secretary Michael Chertoff said the plot was in the final stages of planning before execution.
"The terrorists planned to carry the components of the bombs, including liquid explosive ingredients and detonating devices, disguised as beverages, electronic devices or other common objects," he said.
The US ABC News reported that the explosives were to be concealed in the false bottoms of bottles of sports drink.
In the wake of the foiled plot airports around the world are now enforcing strict new security measures.
Arrests
British police have arrested 24 people in connection with the plot during raids in London, southeast England and Birmingham.
Among those arrested were a Muslim charity worker and a Heathrow Airport employee with an all-area access pass, according to Britain's Channel 4.
According to a Muslim community leader one of the people arrested was a young mother with a six-month-old baby.
In the UK the homes and business of those connected with the plot were being searched while the Bank of England announced it had frozen the accounts of 19 of the 24 men arrested in the alleged terror plot.
CNN reported that an undercover British agent infiltrated the group, giving the authorities intelligence on the alleged plan.
The CNN report which quoted several US government officials, said the men had not bought plane tickets but they were in the process of perusing the Internet to find flights to various cities that had similar departure times.
High alert
Britain and the US immediately raised their nationwide terrorist alerts to the highest possible level.
“We are confident we have disrupted a plan by terrorists to cause untold death and destruction," said London police's Deputy Commissioner Paul Stephenson. "Put simply, this was intended to be mass murder on an unimaginable scale."
Mr Stephenson said the plot had "global dimensions" and that police were cooperating with foreign agencies.
British Interior Minister John Reid said police were confident the main players had been detained.
"The police, acting with the security service MI5 have carried out a major counter-terrorism operation overnight to disrupt an alleged plot to bring down a number of aircraft through mid flight explosions," Mr Reid said.
"Had this plot been carried out, the loss of live to innocent civilians would have been on an unprecedented scale. The police operation is complex, and it is ongoing."
Security sources said they had been watching the suspects for eight months and while they did not rule out an al-Qaeda link, direct involvement by the militant group was played down.
Pakistan link
Britain's domestic Press Association news agency said the 24 people arrested were mainly of Pakistani origin.
Another security source said intelligence agencies in Islamabad had provided key leads to Britain's secret service that enabled them to uncover the plot.
"The actions that have been taken in London were made possible only with the close cooperation between Pakistani and British intelligence," the official said.
"Pakistani intelligence co-operated and provided vital information that led to these actions."
Pakistan came under the spotlight after the suicide attacks on the London transport system when it emerged that some of the British-born bombers had attended Islamic religious schools there.
Pakistani authorities said they had made several arrests in connection with the plot, including at least three people linked to Al-Qaeda.
The US television network ABC news quoted unnamed American officials saying five suspects were still on the loose and being eagerly hunted.
The network also reported that at least two of the suspects had prepared martyrdom tapes. British police declined to comment.
US officials said they saw signs of al-Qaeda's methods, but it was too early to draw conclusions on whether the global militant group was involved.
Airports worldwide tightened security measures on passengers and luggage travelling to and from Britain and the United States, causing travel delays and flight cancellations and leaving many passengers stranded.
Airport chaos
London's Heathrow airport, one of the busiest in the world, was badly hit.
More than 600 British flights were cancelled, airports operator BAA said.
The airline information company OAG told The Guardian newspaper that
around 400,000 people in Britain had been affected by the ensuing chaos.
Passengers on all planes leaving British airports, including on domestic and transit flights, were banned from taking hand luggage on board other than essential items such as money, tickets, keys, medicine and glasses.
Apart from baby milk, which had to be tasted, all liquids were forbidden.
Strict hand luggage restrictions, similar to those imposed by London and Washington, have been introduced at airports around the world.
Travel from Australia
All passengers travelling from Australia to the United States will be forced to comply with heightened security measures.
Qantas says passengers to the US will not be allowed to carry liquids and gels in their hand luggage. This includes all drinks, shampoos, sunscreen, toothpaste and hair gels.
The only exceptions are baby formula, juice for a child or medicine. Passengers' footwear will also be screened.
Qantas has warned passengers to allow more time to check in to their flights.
The airline says the security measures were introduced following instructions from the US Department of Homeland Security.