Police have disrupted a terrorist plot to detonate improvised explosive devices at locations in central Melbourne, possibly on Christmas Day, Prime Minister Malcolm Turnbull says.

Key points: Police believe plot involved use of explosives and other weapons and could have been planned for Christmas Day

Police believe plot involved use of explosives and other weapons and could have been planned for Christmas Day High profile locations including Federation Square and Flinders Street Station were targeted, police say

High profile locations including Federation Square and Flinders Street Station were targeted, police say Five people arrested still in custody and are being questioned by police

Seven people were arrested during overnight raids on Thursday at properties in Flemington, Meadow Heights and Dallas in Melbourne over the alleged plot, which police said was inspired by the Islamic State (IS) group.

Abdullah Chaarani 26 of Dallas, 21-year-old Hamza Abbas of Flemington and 24-year-old Ahmed Mohamad of Meadow Heights have been charged with planning a terrorist attack.

The trio appeared in the Melbourne Magistrates Court and were taken into custody and will return in April.

A 22-year-old man from Broadmeadows was charged with the same offence hours later. He is due to appear in court this morning.

Abdula Chaarani (L), Ahmed Mohamad (C) and Hamza Abbas (R) were all remanded into custody.

A 20-year-old woman and a 26-year-old man, both from Meadow Heights, and 21-year-old man from Gladstone Park, were released without charge.

Victorian Premier Daniel Andrews described the plot as an "act of evil", while Victoria Police Chief Commissioner Graham Ashton said police had seized "the makings of an improvised explosive device".

Speaking at a press conference on Friday, Mr Turnbull said: "Overnight our police and security agencies have disrupted a very substantial terrorist plot.

Some of the men were arrested in a bungalow (L) attached to a house in Meadow Heights. ( ABC News: Cameron Best )

"Overnight, the Victoria Police, working with the Australian Federal Police and ASIO, have arrested seven persons, five of whom are still in custody, searched five premises and are continuing to search them.

Who was arrested? A 24-year-old man from Meadow Heights

A 24-year-old man from Meadow Heights A 26-year-old man from Dallas

A 26-year-old man from Dallas A 22-year-old man from Campbellfield

A 22-year-old man from Campbellfield A 21-year-old man from Flemington

A 21-year-old man from Flemington A 21-year-old man from Gladstone Park

A 21-year-old man from Gladstone Park A 20-year-old woman and a 26-year-old man, both from Meadow Heights, have been released without charge Source: Victoria Police

"What they have uncovered is a plot to explode improvised explosive devices in central Melbourne in the area of Federation Square, on or about Christmas Day.

"This is one of the most substantial terrorist plots that have been disrupted over the last several years."

The raids were part of a counter-terrorism operation involving Victoria Police, the Australian Federal Police and ASIO.

Federation Square, Flinders Street Station possible targets

Possible targets included Flinders Street Station, St Paul's Cathedral and Federation Square ( 774 ABC Melbourne: Simon Leo Brown )

Commissioner Ashton said it was believed a number of people were intending to carry out an attack involving explosives and other weapons.

"Over the last fortnight … we have had to conduct a criminal investigation relating to the formation of what we believe was a terrorist plot," he said.

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

Police believe the locations to be targeted include Federation Square, Flinders Street Station, and St Paul's Cathedral.

Police blocked off a street in Meadow Heights during the raids. ( AAP: Julian Smith )

Commissioner Ashton said: "We believe [the plot] was going to involve an explosive event, the use of explosives, and we gathered evidence to support that.

"There has also been evidence that we will lead around the possibility of an intention to use other weapons. That could include knives and/or a firearm.

"Certainly these [people] are self-radicalised, we believe, but inspired by ISIS and ISIS propaganda."

Sorry, this video has expired Seven arrested in connection with alleged Christmas Day terrorist plot

Commissioner Ashton said four of the five were Australian-born with a Lebanese background.

"There is another suspect in this matter who will be charged that was an Egyptian-born Australian citizen. All the others were Australian-born," he said.

While Premier Andrews said the planned attack was not an act of faith, One Nation Leader Pauline Hanson said the raids demonstrated why there should be a ban on Muslim immigration to Australia.

"You're not welcome here. Go and find some other place that suits your needs, your customs, your way of life and your faith," she said.

Premier Andrews said there would be an increased police presence at large gatherings in Victoria over the Christmas period.

"This is not an act of faith. What was being planned, what will be led in evidence, what the police will allege, was not an act of faith, not an act of religious observance, it was, instead, in its planning, an act of evil, a criminal act," he said.

Commissioner Ashton said he spoke to Cricket Australia about providing additional security at the MCG during the Boxing Day Test, which starts on Monday.