Police say they have foiled a plot to carry out a New Year's Eve terror attack in the Australian city of Melbourne.

A 20-year-old man has been arrested and accused of planning a mass shooting at Federation Square in the city centre.

The man, who has not been named, was born in Australia to Somali parents and was held after police raided a house in the Melbourne suburb of Werribee.

Police claim he is an Islamic State sympathiser and accessed an online guidebook produced by al Qaeda on how to commit terrorism and use firearms.

Officers had been monitoring the man and arrested him as he allegedly met with people to try and buy an automatic rifle.


Image: Shane Patton said the attack could have been 'catastrophic'

The 20-year-old will appear in court late on Tuesday or Wednesday charged with preparing to commit a terrorist attack and collecting documents to facilitate a terrorist act.

If convicted, he faces a maximum penalty of life in prison.

Victoria Police deputy commissioner Shane Patton said the attack would have potentially been "catastrophic".

He added: "What we will be alleging 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.

"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."

Since Australia raised its terror alert level in September 2014, 74 people have been arrested in 347 counter-terror investigations.

Officials say 13 attacks have been prevented in the past few years, including an IS-directed attempt to bring down a plane using poisonous gas or a crude bomb disguised as a meat mincer.