In a day-long operation, the police said they found large quantities of plastic explosives, ammunition, face masks, military uniforms, bombs, food, water and other equipment.
Also found were "propaganda terrorist material, military survival instructions, geographic charts and several CDs," the police statement said.
Four people were arrested, all from Novi Pazar, while one person managed to escape, the statement said.
The police statement did not specify whether the group was planning any attacks in Serbia or elsewhere, or whether it had ties to other Islamic terrorist groups.
Western intelligence reports leaked recently have suggested that Sandzak, as well as Muslim-dominated regions in neighboring Bosnia, could be an ideal recruitment spot for the so-called "white al-Qaeda" - Muslims with Western features who could easily blend into European or US cities to execute attacks.
Several incidents have been reported in Sandzak within the Muslim community, with the Wahhabis accusing local Muslim clerics of failing to practice "true" Islam, and disrupting prayers at local mosques.