"It is about the possible planning of a terror attack in Germany, concretely in Berlin," state prosecution spokesperson Martin Steltner told news wire Dpa.
There are conflicting reports in the media about what the exact target of the attack was, with tabloid Bild citing investigators who say it was Alexanderplatz, the iconic centre of the former east of the capital.
Berlin daily Tagesspiegel meanwhile, says popular tourist spot Checkpoint Charlie - once the most famous crossing in the Berlin Wall - was to be hit, citing security sources.
Prosecutors have made no official comment on a specific target.
Police raided addresses in several German states on Thursday morning, arresting a number of people allegedly planning an Islamist terror attack in Germany or elsewhere in Europe.
Security sources told DPA the group's ringleader was a 35-year-old Algerian arrested in North Rhine-Westphalia.
The man, who was staying in refugee accommodation in the town of Attendorn, was also being sought by Algerian authorities due to a suspected connection to Isis, with whom he is said to have undergone military training in Syria.
DPA also reports that the man arrived as an asylum seeker in Germany in autumn 2015 after travelling through Europe via the so-called Balkan route, which starts in Greece and passes through Macedonia and Serbia.
In Berlin, 450 police officers searched four apartments and two businesses, arresting another Algerian man in the process.
Police are searched the apartments of a 31-year-old male in Berlin and a male 26-year-old in Hanover, where searches were also conducted in a refugee home.
According to investigators, the suspects were all linked to the Syrian civil war.
Surveillance of the suspects has been going on for several weeks.
But suspicions solidified around New Year, when the ringleader is alleged to have travelled from North Rhine-Westphalia to meet his accomplices in Berlin and plan an attack.
There is no indication on whether they had picked a target, or whether that target lay in Germany.
An initial tip-off came for the Verfassungsschutz (German internal intelligence). Police investigations then established a link between the 35-year-old Algerian and the Islamist scene in Berlin and Hanover.
During the raids police seized computers, mobile phones and drawings.
According to Berlin's interior minister, Frank Henkel, the risk of an Islamist attack remains high.
“We have every reason to stay alert and be careful,” he said, arguing for the necessity for decisive action to be taken against the Islamist scene - especially when there is a connection to Isis.
Story continues below…
Since the terror attacks in Paris in November 2015 in which 130 people died, authorities in Germany have repeatedly warned about the risk of a similar attack in the Bundesrepublik (Federal Republic).
In November an international football match between Germany and the Netherlands was cancelled hours before kick-off due to an unspecified threat.
A street party in Munich was also cancelled at New Year for security reasons.
It is believed that fear of a terror attack was the motive for both cancellations.