The 40-year-old Guildford woman was arrested by the NSW joint counter-terrorism team at Parramatta early on Tuesday morning.
It's alleged she made five separate electronic transfers via Western Union to Islamic State.
Her arrest is the result of an ongoing Operation Peqin investigation into the activities of several people alleged to be in involved in terrorist activities, police said.
The woman, an Australian citizen, was not known to authorities, according to Australian Federal Police Detective Superintendent Ben McQuillan.
"We are continuing to investigate both the source of the funds, the methodologies that were used to transfer those funds and the recipients of those funds offshore," he told reporters in Sydney.

There's no evidence the woman was involved in planning a domestic terror attack, police say. Source: NSW Police
There's no evidence the woman was involved in planning a domestic terror attack.
NSW assistant police commissioner Michael Willing said she was an employee of a federal government department.
"I can say we have no evidence her employment is in any way linked to these activities," he said.
The transfers are alleged to have taken place between February and October 2015 and Mr Willing said the charges were laid following legal advice.
"These investigations take time," he said.
"There's a lot of information and evidence to sift through and that's certainly been the case on this occasion."
Det Supt McQuillan confirmed the woman's charges are linked to the 2016 arrest of a 16-year-old Sydney schoolgirl and 20-year-old man under the same broad police operation.
The girl was also accused of raising money for Islamic State, however, Det Supt McQuillan declined to say whether the woman was related to the pair.
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