Police have arrested seven people after executing search warrants overnight (thur) at five properties across Melbourne's northern suburbs.
About 400 police officers were involved in the investigation that led to the raids in suburban Flemington, Meadow Heights, Dallas, Campbellfield and Gladstone Park.
Five people remain in custody and are being questioned.
Police say they expect to charge a number of people with acts in preparation of a terrorist event.
Victoria Police chief commissioner Graham Ashton says the individuals have been people of interest for some period of time.
Mr Ashton says a multi-agency operation between Victoria Police, the Australian Federal Police and the Australian Security Intelligence Organisation foiled the alleged Christmas Day plot.
"We believe that there was an intention to conduct what we called a multi-mode attack, possibly on Christmas Day. The possible locations that we've been working on have been Federation Square, Flinders Street Station and Saint Paul's Cathedral."
Of the five people still in custody, four are Australian-born and one is an Egyptian-born Australian citizen.
Police say they are all aged in their 20s, some have Lebanese heritage, and they are believed to have been inspired by the self-proclaimed Islamic State.
As a result of surveillance activity, police say they have evidence of a reconnaissance mission being conducted near Federation Square.
Mr Ashton says police have seized evidence in the raids this morning (fri) that suggests plans for an explosive attack.
"The attack that we will allege was being planned, we believe certainly was going to involve an explosive event -- the use of explosives -- and we've gathered evidence to support that. There has also been some evidence that we will lead around the possibility of an intention to use other weapons. That could include knives and/or a firearm. There's been some stated intention around that."
Victorian premier Daniel Andrews has thanked the police and security forces for their efforts in thwarting the alleged attack.
Mr Andrews says the arrests show the terrorism threat is very real, across the city of Melbourne and across the state. But he says it is important to remember the disturbing motivation of such an attack.
"This is not an act of faith. What was being planned, what will be led in evidence, what the police will allege, was not an act of faith, it was not an act of religious observance, it was instead, in its planning, an act of evil, a criminal act. And to each and every Victorian, I say this is a very special time of the year. People should go about their business, they should enjoy all that our state has to offer, the values that we cherish."
A number of major events are planned in the busy New Year period, including the Boxing Day cricket Test at the Melbourne Cricket Ground.
Mr Ashton says additional layers of security have been added and there will be a visible, and boosted, police presence across the state.
However, the Police Commissioner also says people should continue to enjoy the holiday period.
"I do stress that there's no intel (intelligence), there's no information, suggesting a threat at this time to any of those events. However, we're just making sure that we are taking those extra precautions, given what we've been dealing with over the last couple of weeks in relation to this group."
