Counter-terrorism police had been monitoring the southwestern Sydney group since the April 15 stabbing, committed by an allegedly terror-inspired 16-year-old.
Their behaviour escalated to a point this week that police were concerned an attack could occur under their noses.
No specific targets had been nominated but the ongoing threat and loose nature of the group including some splinter groups, alarmed authorities, NSW police said.
"Overt action was required," Deputy Commissioner Investigations and Counter Terrorism David Hudson told reporters on Wednesday.
Thirteen search warrants were executed across southwestern Sydney.
On top of seven arrests, five other juveniles are assisting police with inquiries.
Police stressed they were targeting the youths based on alleged criminality, not their background.
"We target radicalisation, not religion," Deputy Commissioner National Security Krissy Barrett said.
It comes a little over a week since the attack on Assyrian bishop Mar Mari Emmanuel and priest Isaac Royel during a live-streamed church service in Wakeley.
The accused teenager had received intermittent treatment for mental health issues for a number of years, his lawyer said during an initial court appearance on Friday.
His charge of committing a terrorist act carries a maximum penalty of life imprisonment.
Leaders from Sydney's Lebanese Muslim community have said the 16-year-old's family did not believe he had been radicalised online before the attack.
The counter-terrorism squad involved in Wednesday's arrests is made up of state and federal police as well as officials from ASIO and the NSW Crime Commission.
Australian Federal Police Commissioner Reece Kershaw, who was giving a National Press Club address when news of the raids broke, described it as a "major operation".
"We do need to make, unfortunately, lawful interventions to prevent any further planning or attack on our community," he said.
Several people have also been arrested and charged over riots that broke out outside the church following the stabbing.
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