A so-called Islamic State-inspired attack in Melbourne planned for Christmas Day has been foiled, according to police.

Seven people who allegedly planned a series of bombings in the heart of Australia's second largest city were arrested on Friday morning.

The group intended to target popular locations such as Melbourne's Flinders Street train station, neighbouring Federation Square and St Paul's Cathedral, it is believed.

Victoria state's Police Chief Commissioner said officers had been monitoring the alleged plotters for some time.

Authorities came to the conclusion that explosives and other weapons were likely to have been used by the conspirators.

However, the immediate threat to the public has now been neutralised through the raids, police confirmed.

The arrests come just days after so-called Islamic State claimed responsibility for a deliberate Christmas market attack in Berlin that left 12 people dead and dozens injured.

On Monday, a seemingly hijacked lorry mowed down Christmas revellers as they enjoyed festivities in the German capital.

The main suspect remains at large.