Police rammed two cars in Liverpool in southwest Sydney and arrested the men on Thursday afternoon, NSW Police Deputy Commissioner David Hudson said.
Vision shared on social media shows tactical operations officers carrying large weapons arresting multiple men en route from Victoria at a busy intersection.
The men remain in custody after a magistrate approved a police application to hold the group without charge under counter-terrorism laws until Friday night.
Mr Hudson said the only weapon found in the car was a knife, but police acted proactively given heightened tensions after gunmen fired on a Jewish festival at Bondi Beach on Sunday, killing 15.
"There's no way in the current environment we could let this (group) run," he said.
When asked on the ABC about the arrested septet having a "similar sort of ideological adherence to Islamic extremism" as those in Sunday's massacre, Mr Hudson replied: "That's our belief at this stage."
"We received information which caused us significant concern in relation to a possible violent act that could have been committed," Mr Hudson told 2GB radio in a separate interview on Friday.
"The strategies utilised yesterday were the most appropriate for the circumstances."
He expects some of the seven men will be charged on Friday.
Mr Hudson stressed there was no definitive link yet between the group and either Naveed or Sajid Akram, the gunmen involved in the Bondi massacre.
Police are examining links between the shootings and Islamic extremism, with homemade Islamic State flags found in a car registered to one of the gunmen.
25°C