A 20-year-old man has been arrested by counter-terrorism police in Melbourne.

Police allege the man was planning to shoot "as many people as he could" in a New Year's Eve attack on Melbourne's Federation Square.

"The allegations are that he was planning to commit a terrorist act and that he attempted to obtain a gun to do so," Victoria Police Deputy Commissioner Shane Patton said.

Victoria Police, Australian Federal Police and ASIO officers arrested the man at his home in Werribee on Monday.

The man is a practicing Muslim, who was born in Australia to Somalian parents.

Police are currently searching his home, where he lives with his parents and siblings. His place of work, a computer business in Footscray, and a relative's home in Meadow Heights were also searched.

"The male is one of our high-risk persons of interest. We have been monitoring him for a very lengthy period of time," Mr Patton told reporters on Tuesday.

The man allegedly accessed a guidebook written by al-Qaeda containing instructions on how to commit a terrorist act and use firearms, guns, handguns and rifles.

The man was trying to obtain an automatic firearm, but was unsuccessful. Mr Patton warned that if the man successful in obtaining a weapon there would have been "horrendous" consequences.

He is said to be associated with a group of Victorian extremists. "We won't identify who they are. It is a very small community of extremists," Mr Patton said.

"There is no ongoing threat posed in respect to New Year's Eve, Christmas or any other area."

"I would like to reassure the people of Victoria that the teams in Victoria, but also around Australia, are working day and night. They are working 24/7 to keep Australia safe," AFP Acting Deputy Commissioner Ian McCartney said.