A man has faced court charged with terrorism offences after allegedly trying to get a gun and plotting to "shoot as many people as he could" on New Year's Eve.

Ali Khalif Shire Ali, 20, from Werribee, was arrested at a home in Melbourne's south-west just before 3:00pm on Monday.

He appeared before Melbourne Magistrates' Court on Tuesday afternoon charged with preparing to commit a terrorist attack and gathering documents to facilitate a terrorist act.

He was described by police as one of their "high persons of interest", and the charges relate to actions Mr Ali took between March and April this year, and in June.

Earlier, Deputy Commissioner Shane Patton said they believed Mr Ali was trying to get an automatic rifle to "shoot and kill as many people as he could" around Federation Square, in Melbourne's CBD, during New Year's Eve celebrations.

Police said they moved in because he had been having face-to-face meetings about getting a gun.

Mr Ali, who police said was connected to other extremists, did not manage to obtain one, Deputy Commissioner Patton said.

Ali Ali was arrested on Monday after police executed warrants at three properties. (Supplied: Victoria Police)

Federation Square is one of the most popular spots in Melbourne to bring in the new year.

Mr Ali is an Australian citizen with Somalian parents.

"We were monitoring this person. He has been subject to our active investigation and at no stage did he access a firearm — albeit that was his intention," Deputy Commissioner Patton said.

"This is a person who would become particularly energised, for a lack of a better word, when overseas events occurred and would express a great deal of interest in committing an attack himself."

One of the charges carries a maximum penalty of life in prison.

Police were still searching the Mr Ali's house in Werribee a day after he was arrested. (AAP: David Crosling)

He said Mr Ali had accessed documents produced by Al Qaeda, including a "guidebook" on how to commit a terrorist act and how to use firearms.

He has been remanded in custody to return to court in March.

New Year's Eve attack could have been 'horrendous'

Deputy Commissioner Patton said there was no ongoing threat for the upcoming Christmas and New Year's Eve period.

"We're quite confident that there's no risk or no threat to the Victorian community now that we have removed him from society and he's being interviewed," he said.

Police said the threat to the community had been contained. (AAP: David Crosling)

However, Deputy Commissioner Patton said the potential of the attack could have been catastrophic.

"This is a person who's expressed an intention to try and kill as many people as he could through shooting them in the Federation Square area on New Year's Eve. Horrendous," he said.

Earlier police said the operation was ongoing but no other arrests were expected.

Mr Ali was arrested on Monday after police executed warrants at his family home in Werribee, and at a relative's home in Meadow Heights.

They also raided a small computer company in Footscray where the man worked part-time.

Police are still searching the man's home and it was "very much an open question" whether his relatives were also involved, Deputy Commissioner Patton said.

Police said the arrest was not linked to any previous operations.

Mr Ali was taken by police to Melbourne Magistrates' Court. (ABC News)

Community should be 'reassured' authorities are keeping them safe

Federal Justice Minister Michael Keenan said it was the 14th plot that has been disrupted in Australia since 2014.

Last year authorities uncovered an alleged plot targeting the same area of Melbourne's CBD during the Christmas period.

Mr Keenan said people should go about their usual routine over the festive season.

"These disruptions remind us of the depravity of the terrorists," he said.

"If this attack were to have gone ahead, it would have been absolutely catastrophic. But the point is it was stopped."

"I'd like to reassure the people of Melbourne and all Australians that our security agencies continue to work around the clock, seven days a week, to keep them safe and continue to disrupt plots that seek to do them harm."