Prime Minister Malcolm Turnbull says police and security agencies have disrupted a "very substantial" terrorist plot planned for the Christmas season.
"This news will be of great concern to all Australians," he said in Sydney on Friday.
"We congregate in public places for Christmas, for New Year's Eve. It is a time of happiness and joy. These terrorists sought to disrupt it. They have been thwarted."
Mr Turnbull noted the recent terror attack in Berlin when a truck was driven into a crowd of people at a Christmas market, killing 12 and injuring 48.
"Islamist terrorism is a global challenge that affects us all. But we must not be cowed by the terrorists," he said.
Earlier on Friday, heavily armed police raided homes across Melbourne's north and arrested seven people.
Five are still in custody and due to face court in the afternoon.
Police allege they were planning to attack Melbourne's Flinders Street Station, Federation Square and St Paul's Cathedral on Christmas Day.
"They also seek to frighten us, to cow us into abandoning our Australian way of life," Mr Turnbull said.
"They want to frighten Australians. They want to divide Australians. They want us to turn on each other. We will not let them succeed."
Mr Turnbull praised the work of police and security agencies in foiling the plot.
"I can assure all Australians that our police services right across the country, our intelligence agencies right across the country, and around the world, are at the highest state of alert," he added, reiterating a point he made after the Berlin attack.
Justice Minister Michael Keenan said that since mid-2014 there had been four terror attacks on Australian soil.
The Melbourne raids represented the 12th potential attack to be disrupted in the past two-and-a-half years.
"But this disruption is amongst the most serious in terms of its intent," he said.
Mr Keenan joined Mr Turnbull in reassuring Australians who "will feel nervous and concerned".
"We are the gold standard for what needs to be done to keep our population safe," he said.
However, he also noted if this attack had succeeded it would have been "horrendous" and may have caused very significant casualties.
Australian Federal Police Commissioner Andrew Colvin said the current threat in Victoria had now been removed.
"They had moved very quickly from an intention to a capability, and developed capability, including quite progressed plans," he said.
