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POLICE in Australia have arrested a man accused of plotting a "catastrophic" New Year's Eve gun attack on a crowded Melbourne square.

The suspect was trying to obtain an automatic rifle to carry out the "lone wolf" atrocity in Australia's second-largest city, said Police Deputy Commissioner Shane Patton.

 The 20-year-old was arrested at a house in Werribee, near Melbourne
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The 20-year-old was arrested at a house in Werribee, near MelbourneCredit: EPA
 Police believe the man was acting alone and is a 'known ISIS sypathiser'
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Police believe the man was acting alone and is a 'known ISIS sypathiser'Credit: EPA

Thousands of revellers are expected to pack downtown Federation Square on December 31st - including hundreds of England cricket fans in the city for the Ashes match just two days earlier.

The arrested man named by police as Ali Khalif Shire Ali is said to have downloaded instructions from an al-Qaeda website on how to launch a terrorist attack and how to use guns.

Patton described the 20-year-old - an Australian-born citizen with Somali parents -  as "a person who's expressed an intention to try and kill as many people as he could through shooting them."

He said authorities have eliminated the threat of the attack, saying “the risk that was posed by this person has been removed.”

 Terror cops search a home linked to the suspect
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Terror cops search a home linked to the suspectCredit: EPA
 Counter-terrorism police had been monitoring the man
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Counter-terrorism police had been monitoring the manCredit: EPA

Justice Minister Michael Keenan said police arrested four extremists last December over a similar plot to attack Federal Square over the Christmas-New Year period.

Keenan urged the public to continue with their usual routines and expect to see a heavy police presence.

“The aim of these terrorists is to foster fear and intimidation, but Australians should be able to go about their business secure in the understanding that the government has worked very closely with law enforcement and other security agencies to keep them safe,” Keenan told reporters.

Counter-terrorism police had been monitoring the latest suspect, who they described as a known extremist and ISIS sympathiser, and arrested him as he tried to buy a gun.

 Victorian Police Deputy Commissioner Shane Paton (r) address the media
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Victorian Police Deputy Commissioner Shane Paton (r) address the mediaCredit: EPA

Australia has strict gun laws and automatic weapons are banned from private ownership.

The man is the 74th suspect arrested in Australia in 31 counter-terrorism investigations since Australia’s terrorism threat level was elevated to “probable” in September 2014.

The plot was the 14th that police say they had disrupted since the terrorist threat level was raised. Five plots have been executed.

Police expect he will appear in a Melbourne court late on Tuesday or Wednesday on charges of preparing to commit a terrorist attack and collecting documents to facilitate a terrorist act.

People convicted of those crimes in Australia face a maximum penalty of life in prison.

Search warrants were issued on Monday at a home in a suburb where the suspect lived with his parents and siblings, at a relative’s address in another suburb and at a computer business where he once had a part-time job.

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