A teenage terror suspect has been shot dead after allegedly stabbing two police officers during a counter-terrorism operation in Melbourne.

The 18-year-old made repeated threats against the Australian Prime Minister, Tony Abbott, moments before being shot, ABC news reported.

The unnamed man is believed to be a "person of interest" being investigated over alleged terrorism offences following the Islamic State (Isis) call to supporters to carry out murders in their home countries.

He was among several people who recently had their passports cancelled by authorities as part of counter-terrorism measures.

The incident happened outside a police station in the western Endeavour Hills area of Melbourne at 7.40pm local time on Tuesday.

Both of the injured police officers were part of a joint counter-terrorism force and had gone to meet the teenager.

One officer was from the Victoria state police and another was from the Australian Federal Police. They are both in a stable condition in hospital.

Australia's Government vowed to crack down on extremism after security forces foiled a plot believed to have been directed by Islamic State (Isis militants) last week.

Mr Abbott said supporters planned to film a beheading of a random victim in Sydney similar to Lee Rigby's murder in Woolwich.

“The exhortations, quite direct exhortations, were coming from an Australian, who is apparently quite senior in Isil (Isis), to networks of support back in Australia to conduct demonstration killings here in this country,” he added.

Video: Australia's anti-terrorism raids in Sydney last week

Knives, a gun, machetes and military equipment were reportedly seized in resulting raids in Sydney and Brisbane where 15 people were detained.