Police shot and seriously wounded another suspected extremist during the raids in Sydney and Melbourne on Tuesday, a week after the government said it had credible information an attack was being planned.
Prosecutors said that chemicals seized in the raids were like those used in July's London bombings and that the group was prepared to kill Australians and had discussed mounting suicide bombings.
Hundreds of police backed by helicopters were involved in the raids on more than 20 homes in the country's largest counter-terrorist action.
"I am satisfied that we have disrupted what I would regard as the final stages of a large-scale terrorist attack, or the launch of a terrorist attack, in Australia," said New South Wales police commissioner Ken Moroney.
After a 16-month investigation, police arrested eight people in Sydney and nine in Melbourne, including Algerian-born cleric Abu Bakr, who has in the past praised al-Qaida leader Osama bin Ladin as "a great man".
Those arrested in Melbourne were rushed to court, where prosecutors said Melbourne-based Abu Bakr was the leader of both the Sydney and Melbourne groups, which were "committed to the cause of violent jihad", or holy war.
The cleric was charged with directing activities of a "terrorist organisation" while the others were charged with membership.
Police told the court that the Melbourne group undertook military training and held discussions on martyrdom and suicide bombing.
Police stand outside one of the
homes raided in Sydney
There was allegedly a rivalry between the two groups because the Sydney group was closest to carrying out an attack.
"The members of the Sydney group have been gathering chemicals of a kind that were used in the London Underground bombings," prosecutor Richard Maidment told the court, referring to July's attacks that killed 56 people, including the four bombers.
Police did not detail specific targets selected, but officials have said in recent months that suspects had carried out surveillance on the Sydney Opera House and Harbour Bridge, railway stations and the Melbourne stock exchange.
One of the Sydney suspects was shot in the neck after he fired at police who ordered him to stop as he walked along a suburban street carrying a backpack, police said.
The man was critically injured and underwent surgery in a Sydney hospital as bomb squad officers used a remote-controlled robot to examine the contents of his backpack, where a second handgun was found, national radio reported.
Victoria state police commissioner Christine Nixon said the alleged plot did not involve next year's Commonwealth Games in Melbourne.
State police chief Moroney said investigations into the arrested men's associates were ongoing, while federal police said they were examining computers seized during the raids for any evidence of links to international extremist groups.