Police in Australia have used pepper spray to separate more than 300 angry protesters as anti-Islam and anti-racism groups clashed in the streets of Melbourne, the country's second biggest city.

Seven men were arrested in Coburg, a northern suburb of Melbourne, on Saturday after anti-Islam protesters, some draped in the Australian flag, began fighting with their rivals.

TV footage showed protesters using Australian flags to beat other demonstrators, before police moved in and used capsicum spray to stop the violence.

In one incident, a member of the United Patriots Front (UPF), which organised Saturday's anti-Islam and anti-immigrant rally, fell to the ground and was kicked several times by two anti-racism activists.

When asked about the opposing groups, Prime Minister Malcolm Turnbull said the multicultural nature of Australian society was "one of our great achievements.

"We are united, we have so much in common, and we are stronger and more prosperous as a nation because of that diversity," he told reporters.

Attacks against Australia's Muslim community have increased in recent years, partly owing to the rise of the Islamic State of Iraq and the Levant (ISIL, also known as ISIS) group.

In November, a survey by the Western Sydney University found that Muslims in Australia experience racism three times the national average.

Source: Agencies