A senior member of terrorist group Islamic State urged random public beheadings in Australia as “demonstration killings” in a plot that sparked the nation’s biggest-ever anti-terrorism raids.

Sydney man Omarjan Azari is in custody, charged with preparing a terrorist plan involving what police alleged was “random selection” of members of the public for execution.

Azari allegedly conspired with reportedly senior IS figure Mohammad Baryalei, an Afghan refugee turned Kings Cross bouncer and actor who is now wanted for terrorism offences.

Fourteen more people were arrested in dawn raids on a dozen suburbs across Sydney on Thursday.

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Prime Minister Tony Abbott, who was briefed before the raids, indicated intelligence reports had shown public beheadings were urged by leaders of Islamic State, the Syria-based terror group also known as ISIL.

A man is arrested early Thursday morning in Sydney’s north-west suburbs.

“The exhortations, quite direct exhortations, were coming from an Australian who is apparently quite senior in ISIL, to networks of support back in Australia to conduct demonstration killings here in this country,” Mr Abbott said.

“This is not just suspicion, this is intent.”

Azari, 22, of Guildford, was refused bail after being charged with preparing for a terrorist act.

Baryalei, reportedly from an upper-class Afghan family, appeared in an episode of the Underbelly true crime TV series before becoming a street preacher.

The ABC has reported he is now a senior IS member and a key recruiter for the terror group in Syria.

Police allege Azari conspired with Baryalei in plans designed to “shock” and “horrify” the community.

The plan involved the “random selection of persons to rather gruesomely execute”, prosecutor Michael Allnutt told Sydney’s Central Local Court.

Azari’s defence barrister said the police case was based on a single phone call.

The raids sparked a protest organised by conservative Islamic group Hizb Ut-Tahrir in Sydney’s Lakemba on Thursday night.

The organisation said the Muslim community was “squarely the target of these raids”.

Police warned they would be monitoring the protest after NSW Police Commissioner Andrew Scipione announced a new Operation Hammerhead would commit 220 officers to patrol trouble spots “where potentially people may want to either take some retribution or in fact create trauma within our communities”.

The raids involved more than 800 police executing 25 search warrants on properties and cars across Sydney.

Police helicopters illuminated the houses with spotlights and officers called out suspects with megaphones during the raids.

Forensic officers continued working at houses during the day.

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An ornate sword, emblazoned with Arabic lettering, was removed from a house in Marsfield and police dug in the front yard of a Guildford home.

Three more raids occurred in Queensland on Thursday morning with Queensland Police Commissioner Ian Stewart confirming there was a link to the NSW events.

Police also said Thursday’s operation followed up on raids carried out a week earlier in Queensland in which two men were arrested on terrorism charges.

Police execute a search warrant in Sydney.

As one of the Queensland suspects, Omar Succarieh, was refused bail, Queensland Premier Campbell Newman said authorities had uncovered “disturbing” new information about the plans of one of the men.

“It may now be alleged that at least one individual was contemplating on-shore terrorist action,” Mr Newman said.

The operation followed Australia’s outgoing spy chief, ASIO director David Irvine, raising the terror alert level to “high” last Friday.

The alleged beheading plot raised comparisons to the brutal 2013 attack on British soldier Lee Rigby, who was hacked to death by two Islamic extremists in the street outside his London barracks.

Chief of Defence Mark Binskin said the defence force was constantly reviewing security at its bases and may adjust the level of security over coming days.

-AAP