Terrorism raids in Sydney were sparked by security intelligence that the Islamic State (IS) movement was planning a public killing as a demonstration of its reach.

Australian police detained 15 people in a major counter-terrorism operation, saying intelligence indicated a random, violent attack was being planned on Australian soil.

Prime Minister Tony Abbott said he had been briefed about the operation which had been prompted by information that an IS movement leader in the Middle East was calling on Australian supporters to kill.

"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," Mr Abbott said.

He was referring to the al Qaida splinter group leading Sunni militants in Iraq, Islamic State of Iraq and the Levant, which now calls itself simply Islamic State.

"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," he added.

He did not name the Australian.

Police have issued an arrest warrant for a former Sydney nightclub bouncer, Mohammad Ali Baryalei, 33, who is suspected to be Australia's most senior member of the IS group in Syria and Iraq.

About 800 police officers raided more than a dozen properties across Sydney as part of the operation - the largest in Australian history, federal police deputy commissioner Andrew Colvin said.

Separate raids in the eastern cities of Brisbane and Logan were also conducted.

One of those arrested, 22-year-old Omarjan Azari, appeared briefly in a Sydney court.

Prosecutor Michael Allnutt said he was involved in a "plan to commit extremely serious offences" that were "clearly designed to shock and horrify" the public.

Azari is charged with conspiracy to prepare for a terrorist attack. The potential penalty was not immediately clear.

In court documents, Azari was accused of conspiring with Baryalei and others between May and September of this year to prepare for a terrorist attack.

Azari did not apply for bail and did not enter a plea. His next court appearance was set for November 13.

The arrests come just days after the country raised its terror warning to the second-highest level in response to the domestic threat posed by supporters of IS.

"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," said Mr Colvin.

"Those violent acts particularly related to random acts against members of the public. So what we saw today and the operation that continues was very much about police disrupting the potential for violence against the Australian community at the earliest possible opportunity."

Police declined to reveal exact details of the attack they believe was being plotted. New South Wales police commissioner Andrew Scipione said only that it was to be carried out against a member of the public on the street and was at "a very high level".

"Right now is a time for calm," he said. "We need to let people know that they are safe, and certainly from our perspective, we know that the work this morning will ensure that all of those plans that may have been on foot have been thwarted."

Last week, Australian police arrested two men in Brisbane for allegedly preparing to fight in Syria, recruiting jihadists and raising money for the al Qaida offshoot group Jabhat al-Nusra, also known as the Nusra Front.

Mr Colvin said the raids in Brisbane were a follow-up to that operation. It was not yet clear how the investigations in Sydney and Brisbane were linked, he said.

The government raised its terrorism threat last week from "medium" to "high" on a four-tier scale on the advice of the Australian security intelligence organisation.

The domestic spy agency's director-general David Irvine said the threat had been rising over the past year, mainly due to Australians joining IS to fight in Syria and Iraq.

When announcing the elevated threat level, Mr Abbott stressed there was no information suggesting a terror attack was imminent.

Police said raids were conducted in a dozen suburbs of Sydney and in three suburbs across Brisbane and adjoining Logan.

A Muslim book shop and community centre in Logan was at the centre of counter-terrorism raids on several properties last week.

Police said at the time there was no terrorist threat to the Group of 20 leaders' summit to be hosted by Brisbane in November which will bring President Barack Obama and other leaders of the world's 20 biggest economies to the Queensland state capital.

Australia has estimated about 60 of its citizens are fighting for the IS group and the Nusra Front in Iraq and Syria. Another 15 Australian fighters had been killed, including two young suicide bombers.

The government has said it believes about 100 Australians are actively supporting extremist groups from within Australia, recruiting fighters and grooming suicide bomber candidates as well as providing funds and equipment.