Australia's largest ever counter-terrorism raids on Thursday detained 15 people and foiled an alleged plot by Islamic State jihadists to conduct "demonstration killings", including beheading a random member of the public.

A major pre-dawn operation was carried out across Sydney and Brisbane by more than 800 officers acting on some 25 search warrants. One person has so far been charged with serious terrorism-related offences.

At least one gun was seized, along with a sword.

Omarjan Azari, 22, appeared in a Sydney court and was remanded in custody, charged with planning a terrorist act which prosecutors alleged was designed to "shock, horrify and terrify" the community.

The court heard he was instructed in a recent phone call by the most senior Australian member of Islamic State, Afghan-born Mohammad Baryalei, to commit the atrocity.

Prosecutor Michael Allnutt alleged the plan involved the "random selection of persons to rather gruesomely execute" on camera and involved "an unusual level of fanaticism".

The Australian Broadcasting Corporation said the video was then to be sent back to IS's media unit in the Middle East, where it would be released to the public.

The jihadists have in recent weeks broadcast video footage of three foreign nationals being beheaded in Syria.

The raids, which spanned multiple suburbs, came barely a week after Australia boosted the terror threat level to "high" for the first time in a decade on growing concern about militants returning from fighting in Iraq and Syria.

Prime Minister Tony Abbott said he had been briefed on intelligence that public beheadings had been ordered by IS militants.

"That's the intelligence we received," he said, prompting comparisons to the murder of British soldier Lee Rigby, who was hacked to death in a random attack on a street in England last year by two Muslim converts.

"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," added the prime minister.

"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."

- 'Very real threat' -

The Australian government believes up to 60 Australians are fighting alongside jihadists for IS, while another 100 were actively working to support the movement at home.

"These people, I regret to say, do not hate us for what we do, they hate us for who we are and how we live. That's what makes us a target," said Abbott.

"It's important our police and security organisations be one step ahead of them and this morning they were."

The latest raids followed the arrests of two people last week in Brisbane who were charged with allegedly recruiting, funding and sending jihadist fighters to Syria.

One of the men was allegedly planning on-shore "terrorist action", Queensland Premier Campbell Newman said Thursday, without giving further details.

And, on Wednesday, a Sydney-based money transfer business was shut down amid concerns it was being used to funnel funds to the Middle East to finance terrorism.

New South Wales Police Commissioner Andrew Scipione urged calm.

"Right now is a time for calm. We actually need to let people know that they are safe," he said, adding that 220 police would now participate in Operation Hammerhead, to monitor transport hubs and important and iconic sites.

Last week's decision to increase the terror threat level after years on "medium" officially means a "terrorist attack is likely", and comes after repeated government warnings that attacks could happen.

The raising of the threat level was "not based on knowledge of a specific attack plan but rather a body of evidence that points to the increased likelihood of a terrorist attack in Australia", Abbott said at the time.

The "high" alert is just below "extreme" -- the top level -- which would indicate a "terrorist attack is imminent or has occurred".