MELBOURNE - An Islamic State sympathizer planned to buy a gun and kill as many revelers as possible on New Year's Eve in Melbourne, police alleged on Tuesday after foiling the plot.

Ali Ali, born in Australia to Somali parents, was arrested in a raid on a house in the Melbourne suburb of Werribee on Monday.

He appeared in court on Tuesday charged with preparing to commit a terrorist attack and collecting documents to facilitate a terror attack. No bail was applied for.

Police claim the 20-year-old accessed a guide book online produced by al-Qaida on how to carry out terror acts and use firearms, but was arrested before he could purchase an automatic rifle.

"What we will be alleging is that he was intending to use a firearm to shoot and kill as many people as he could in the Federation Square area on New Year's Eve," said Victoria Police Deputy Commissioner Shane Patton.

"It is a tremendous concern to us that (during) the festive season, when people are out enjoying themselves, that there is a potential plot to commit a terrorist act. That is a huge issue for us but that is why we put the resources in."

Federation Square is in the heart of the city, opposite a busy train station and St Paul's Cathedral. It is one of the most popular places to see-in the new year and would be packed on Dec 31.

The alleged plot comes a year after police prevented what they said was another attack in the same area on Christmas Day, arresting several men who planned to use explosives, knives and guns to target the location.

Patton said Ali, who lives with his parents, had been on their radar since the beginning of the year, part of a small community of extremists that police have been monitoring.

His behavior had gradually escalated over time, but police believe he was acting alone. "The potential of the attack was catastrophic," said Patton, adding that Ali was an "IS sympathizer".

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