Australian police have foiled a major terror attack in Melbourne on Christmas Day, officials say.

Three men detained in early morning raids on Friday are facing terror charges. Three other people were held but later released.

The plot involved the use of explosives and other weapons, police say.

The alleged targets included high-profile locations around Melbourne, such as St Paul's Cathedral, Federation Square and the main train station.

Six men and a woman were detained in Friday's raid on suspicion of "preparing or planning a terrorist attack", police say.

The woman and two men were later released.

Three other men, named as Hamza Abbas, 21, Ahmed Mohamed, 24, and Abdullah Chaarani, 26, did not enter pleas and are due to appear in court in April. Another man remains in custody.

Victoria State police chief Graham Ashton said that following Friday's arrests, there was no longer a threat to the public.

Prime Minister Malcolm Turnbull said the plot was one of the most substantial that has been disrupted in recent years.

"They want to frighten Australians, they want to divide Australians, they want us to turn on each other, but we will not let them," he said.

'Self-radicalised'

Four of the initial suspects were Australian-born and of a Lebanese origin, while the fifth was an Australian of Egyptian origin, Mr Ashton told reporters.

Those being held had been "self-radicalised" but inspired by propaganda of the so-called Islamic State (IS), he said.

Mr Ashton said the raids on five locations in Melbourne's north and west came after weeks of police surveillance.

"We believe that there was an intention to conduct what we call a multi-mode attack, possibly on Christmas Day," he said.

Melbourne's Flinders St Station, Federation Square and St Paul's Cathedral occupy three corners of what is arguably the city's most iconic intersection.

The area is only a short distance from the Melbourne Cricket Ground where up to 100,000 people are expected to attend the Boxing Day Test between Australia and Pakistan.

The operation included 400 officers from Victoria Police and the Australian Federal Police. The Australian Security Intelligence Organisation was also involved.