The 20-year-old was detained in a raid on a house in the Melbourne suburb of Werribee yesterday and was being questioned. No charges have yet been laid.
"It will be alleged the man arrested was involved in undertaking preparations for planning a terrorist act in Melbourne on New Year's Eve this year," Victoria state police said.
"The operation is ongoing, however the main lines of enquiry have been completed and at this time police do not anticipate further arrests."
Authorities say 13 attacks have been prevented in the past few years, including an Islamic State-inspired Christmas Day plot targeting central Melbourne last year.
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In that foiled attack, police said several men planned to use explosives, knives and guns to target busy locations including Melbourne's Flinders Street train station, Federation Square and St Paul's Cathedral.
Another recent thwarted plot involved an IS-directed attempt to bring down a plane using poisonous gas or a crude bomb disguised as a meat mincer.