Police foil Australia New Year's Eve 'terror plot'

An Islamic State sympathiser planned to buy a gun and kill as many revellers as possible on New Year's Eve in Melbourne, police claimed on Tuesday after foiling the plot.

Ali Ali, born in Australia to Somalian parents, was arrested in a raid on a house in the Melbourne suburb of Werribee on Monday.

He appeared in court on Tuesday charged with preparing to commit a terrorist attack and collecting documents to facilitate a terror attack. No bail was applied for.

The police claim the 20-year-old accessed a guidebook online produced by the al-Qaeda on how to carry out terror acts and use firearms but were arrested before he could purchase an automatic rifle.

"What we will be claiming is that he was intending to use a firearm to shoot and kill as many people as he could in the Federation Square area on New Year's Eve," said Victoria Police Deputy Commissioner Shane Patton.

"It is a tremendous concern to us that (during) the festive season when people are out enjoying themselves, that there is a potential plot to commit a terrorist act. That is a huge issue for us but that is why we put the resources in."

Federation Square is in the heart of the city, opposite a busy train station and St Paul's Cathedral. It is one of the most popular places to see in the new year and would be packed on December 31.

The comes a year after police prevented what they said was another attack in the same area on Christmas Day, arresting several men who planned to use explosives, knives and guns to target the location.

Patton said Ali, who lives with his parents, had been on their radar since the beginning of the year, part of a small community of extremists that police have been monitoring.

His behaviour had gradually escalated over time, but the police believe he was acting alone.

"The potential of the attack was catastrophic," said Patton, adding that the man was an "Islamic State sympathiser".