Five men were arrested during early-morning raids in the city on Friday (December 23).
Graham Ashton, Victoria police chief said authorities believed the attack would have involved the "use of explosives" and other weapons including "knives or a firearm".
He said the planned attack was looking to target the city’s popular tourist locations including Flinders St Station, Federation Square and St Paul’s Cathedral.
Ashton added that following the police arrests, there was no longer a threat to the public.
"We don’t have any threat over and above that threat that we’ve currently neutralised," he told members of the media during a press conference.
Four of the suspects were Australian-born men of Lebanese origin in their 20s, while a fifth was an Australian national with Egyptian heritage, Ashton said.
He claimed the suspects were "self-radicalised" but had taken inspiration for the attack from Islamic State propaganda.
Another man and a woman had been arrested as part of the raids in the north and west of the city, but were later released without charge.
Ashton said the operation had been carried out following weeks of police surveillance.
The action involved 400 officers from Victoria Police and the Australian Federal Police.
The Australian Security Intelligence Organisation was also involved, BBC News reports.
"We believe that there was an intention to conduct what we call a multi-mode attack, possibly on Christmas Day," Ashton said.
As a result of the foiled attack, authorities said they would be increasing their presence at Flinders St Station, Federation Square and St Paul’s Cathedral.
Ashton said security services would also be increasing their presence at the Melbourne Cricket Ground where up to 100,000 people are expected to attend the Boxing Day Test between Australia and Pakistan.
"I do stress that there’s no information at this time suggesting a threat to any of those events," he added. "However, we are taking extra precautions."
