Police said two men are in custody after they conducted an operation in Arncliffe in Sydney's south on Sunday.
They were unable to immediately provide more details or confirm reports on Twitter of a bomb threat.
Jamal Daoud, of the Social Justice Network, said he was contacted by a member of the Muslim community who said two Wahibi extremists had threatened Shia Muslims gathered to observe the day of Ashura at the Masjid Fatima Al Zahrah mosque.
Ashura is commemorated by Shia Muslims as a day of mourning for the martyrdom in battle of Husayn ibn Ali, the grandson of Mohammad.
"We have information that two men were arrested when they attempted attacking masses of Shia Muslims remembering the Ashura in Arncliffe," Mr Daoud said.
He said the action came after calls for violence against Shia were made on Facebook on Saturday.
Mr Daoud said worshippers at the mosque called police when they became suspicious of attempts by the two men to use their mobile phones.