Australian police have foiled a plot to attack prominent sites in the city of Melbourne with a series of bombs on Christmas Day.

Authorities said that "an imminent terrorist event", inspired by the so-called Islamic State group, had now been removed "in its entirety".

After conducting overnight raids on homes in the suburbs of Australia's second-largest city, police laid terrorism charges against one man, and were expected to charge at least three others.

Six men and a woman, all Australian citizens in their 20s, were arrested during the raids, which were conducted by about 400 police and members of Australia's domestic spy agency.

Australian Prime Minister Malcolm Turnbull said the planned attack was an "Islamist terrorist plot" and "one of the most substantial terrorist plots that have been disrupted over the last several years".

The plot targeted high-profile locations in Melbourne, including Federation Square, Flinders Street Station and St Paul's Cathedral "possibly on Christmas Day", acting Victorian police commissioner Graham Ashton said.

The suspects had been under close surveillance for a fortnight, he said.

One of the suspected planners in custody was an Egyptian-born Australian and the others were all Australian-born of Lebanese descent, Commissioner Ashton told reporters.

He said the threat had now been "removed ... in its entirety", however security in Melbourne has been boosted.

Few details have been released about what evidence was collected by police during the raids in suburbs in Melbourne's northwest but Commissioner Ashton said the attacks would likely have involved explosives and either guns or knives.

"This is a significant disruption of what we would describe as an imminent terrorist event in Melbourne," Australian Federal Police Commissioner Andrew Colin told reporters in Sydney.

Australia, a staunch US ally which sent troops to fight in Afghanistan and Iraq, has been on heightened alert for attacks by home-grown radicals since 2014.