Pre-dawn raids across Sydney and Brisbane led to the arrest of 15 people and the reported seizure of a scimitar, a gun, machetes, balaclavas and military fatigues which authorities said were to be used in a plot to "shock, horrify and terrorise" the community.
The raids involved more than 800 security officers and marked the biggest counter-terrorism operation in Australian history.
Tony Abbott, Australia's prime minister, said the raids followed intelligence that a senior figure in the Islamic State of Iraq and the Levant (Isil) had been directing operatives in Australia to perform "demonstration killings".
"The exhortations, quite direct exhortations, were coming from an Australian, who is apparently quite senior in Isil, to networks of support back in Australia to conduct demonstration killings here in this country," he told reporters in the Northern Territory.
"So this is not just suspicion, this is intent and that's why the police and security agencies decided to act in the way they have."
The raids reportedly followed intercepted phone calls in which the arrested men discussed kidnapping strangers from public streets, beheading them and posting a film of the executions on social media.
The plot was likened to the murder of British soldier Lee Rigby who was hacked to death on a street in London last year by two Muslim converts.
Australian Federal Police acting commissioner Andrew Colvin said the detainees had been plotting a violent attack for "the streets of [Australia's largest state] New South Wales".
"Police believe that this group that we have executed this operation on today had the intention and had started to carry out planning to commit violent acts here in Australia," he said. "Those violent acts particularly related to random acts against members of the public…
The decision was made by the experts that now was the time to move."
One of the arrested men, Omarjan Azari, (22) faced court on charges of plotting a terrorist act. A Commonwealth prosecutor, Mr Michael Allnutt, told court that Mr Azari's plan involved the "random selection of persons to rather gruesomely execute" - a plot designed to "shock, horrify and clearly terrify the community". "There is perhaps an unusual level of fanaticism in this particular matter," he said, adding that the immediate trigger for the arrest was a phone call that took place "only a couple of days ago". Defence lawyer Steven Boland told the court: "The allegation is based on one phone call." Australia last week raised its terror threat level for the first time from medium to high following warnings from intelligence agencies about Australian Islamic extremist (©Daily Telegraph, London)