The plot involved attacking prominent sites in Melbourne with explosives, guns and knives on Christmas day.
Australian police said on Friday it foiled a plot to attack prominent sites in the city of Melbourne with a series of bombs on Christmas day that authorities described as "an imminent terrorist event" inspired by Daesh.
Those detained planned to use explosives, knives and guns to attack busy locations including Melbourne's Flinders Street train station, Federation Square and St Paul's Cathedral.
"Over the last fortnight... we have had to conduct a criminal investigation relating to the formation of what we believe was a terrorist plot," said Victoria Police chief commissioner Graham Ashton at a news conference.
Six men and a woman, all in their twenties, were arrested in dawn raids on Thursday and Friday across Melbourne, Australia's second-largest city, Victoria state police said in a statement.
Ashton added that one of the suspected planners was an Egyptian-born Australian and the others were all Australian-born.
Prime Minister Malcolm Turnbull said a potential disaster had been averted in Melbourne and praised police and security services.
"This is one of the most substantial terrorist plots that have been disrupted over the last several years," he said in Sydney.
The foiled plot comes with security on heightened alert in Australia after a truck drove into a Christmas market in Berlin, killing 12 people in an attack claimed by Daesh.
Australia, a staunch US ally which sent troops to fight in Afghanistan and Iraq, has been on heightened alert for attacks since 2014.
Authorities have said they have thwarted a number of plots, in recent years.
There have also been several "lone wolf" assaults, including a 2014 cafe siege in Sydney in which two hostages and a gunman were killed, along with a separate incident in 2015 where a police accountant was killed.