Australian police have shot dead a man after he stabbed two counter-terrorism officers.

It comes just days after sweeping raids involving hundreds of police thwarted what they said was an imminent plot to behead a member of the public.

Australia, a staunch ally of the United States and its escalating action against the Islamic State group in Syria and Iraq, is on high alert for attacks by home-grown militants returning from fighting in the Middle East.

The 18-year-old man had been asked to attend a police station in the southern state of Victoria because his behaviour was "causing concern".

Assistant Commissioner of Victoria Police Luke Cornelius said: "It's believed that an altercation has occurred in the vicinity of the police station involving the two police officers and that male person".

He said the young man "produced an edged weapon" in the course of the altercation.

"It's absolutely clear to us our members had no choice but to act in the way that they did."

The two officers were taken to hospital with one suffering serious stab wounds, police said.

Both are now said to be in a stable condition.

Police said the man had been displaying a flag linked to the militant group the Islamic State.

Local media reported he had been shouting insults about Prime Minister Tony Abbott and the government before he was shot and died.

"I can advise that the person in question was a known terror suspect who was a person of interest to law enforcement and intelligence agencies," Justice Minister Michael Keenan told reporters.

Earlier this week, Mr Abbott warned Australians the balance between freedom and security "may have to shift", as he outlined broad new powers expected to be introduced to parliament this week.

Mr Abbott has said that at least 100 Australians are in the Middle East either fighting with or supporting Islamic State or other militant groups.

At least 20 are believed by authorities to have returned to Australia and pose a security risk.

Earlier this month the national security agency for the first time raised its four-tier threat level to "high".

Highlighting the threat posed by returning fighters, Australia was swift to commit troops and aircraft to a US-led coalition fighting Islamic State militants in Iraq and Syria earlier this month.

US and Arab allies today bombed militant groups in Syria for the first time, killing scores of Islamic State fighters and members of a separate al-Qaeda-linked group.

More than 800 police were involved in a security operation in Sydney and Brisbane last Thursday, which authorities said had thwarted a plot by militants linked to the Islamic State group to behead a random member of the public.

Security was also boosted at Parliament House in Canberra, after intelligence "chatter" had revealed a plot to attack the building and politicians on orders from overseas militants.