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Australia says it foiled a "terrorist plot" to bring down an airplane with an improvised explosive, following raids in Sydney.

"I can report last night that there has been a major joint counter-terrorism operation to disrupt a terrorist plot to bring down an airplane," Australian Prime Minister Malcolm Turnbull said.

Four suspects were arrested in the Sydney raids on Saturday in what Australian Federal Police Commissioner Andrew Colvin described as an "Islamic-inspired" plot.

"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 IED (improvised explosive device)," he told reporters. 

It is not clear if a domestic or international flight was the target but it appears a local route could have been the aim.

Security has been stepped up at airports with travellers told to arrive two hours early for screenings, he added.

The prime minister said there was "more in that category of an elaborate plot" rather than a more amateur attempt.

Counter-terrorism units have made a wave of arrests in Australia in recent years, and claim to have prevented 12 terror attacks inside the country.

A cafe siege in 2014 cost the lives of two hostages, while a Sydney police employee was murdered by a 15-year-old boy in 2015.