Australian Federal Police Commissioner Andrew Colivn said details were scant on the specifics of the attack, the location and timing.
"In recent days, law enforcement has been become aware of information that suggested some people in Sydney were planning to commit a terrorist attack using an improvised devise," Colvin said.
"We are investigating information indicating the aviation industry was potentially a target of that attack," he added.
Justice Minister Michael Keenan said the plot was the 13th significant threat disrupted by police since Australia's terrorist threat level was elevated in 2014. Five plots have been executed.
"The primary threat to Australia still remains lone actors, but the events overnight remind us that there is still the ability for people to have sophisticated plots and sophisticated attacks still remain a real threat," Keenan said.
" In light of this information, it's very important that everyone in Australia remains vigilant."
The operation was carried out by the Australian Federal Police, the New South Wales state police and the Australian Security Intelligence Organization, the country's main domestic spy agency. The investigation could continue for days, Colvin said.
Seven Network television reported that 40 riot squad officers wearing gas masks stormed an inner-Sydney house before an explosives team found a suspicious device.
A woman led from a raid by police with her head covered, said to be the mother of a son and her husband arrested by police in connection with terrorist offences told Nine Network Television: "I love Australia."
Sources: CNS, AFP, BBCNEWS, FlightGlobal
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