German authorities were tipped off by a “friendly intelligence service” about the plan, which IS had planned to carry out around midnight, said Joachim Herrmann, interior minister for the southern state of Bavaria.
“Five to seven” suspects were believed to be planning to carry out a “suicide attack” as festivities were under way to welcome in the New Year, Munich police chief Hubertus Andrae said.
Police evacuated Munich’s main rail station and another station in the western suburb of Pasing after an alert of a possible “terror attack”.
Rail services at the sites were also halted and police urged the public to keep away from large gatherings.
Some 550 officers had been deployed to track down the suspects and secure the sites, although no arrests have been made yet.
Police officers, some in riot gear, were posted at different entrances of Munich’s main rail station which was eerily quiet on a night of traditionally raucous celebrations. Some revellers sought to enter the station but were turned away.
A police spokeswoman said it could not be ruled out that the attackers could seek another target.
German media had earlier reported that police were acting on a tip from French authorities.
European capitals are on high security alert, with Brussels and Paris both scrapping fireworks for New Year’s celebrations. Belgian police were also holding five people over an alleged New Year plot in Brussels.
In Berlin, police presence has been stepped up at the Brandenburg Gate, where hundreds of thousands of people have gathered for festivities. All large bags and backpacks have been banned from the site of the huge street party.
Days after the November 13 attacks in Paris claimed by the Islamic State group that left 130 dead, German police called off an international football match at the last minute due to a bomb threat.
No explosives were subsequently found, and no arrests made after the Germany-Netherlands friendly in Hanover — which was to be attended by Chancellor Angela Merkel — was cancelled and thousands of fans evacuated.
Interior Minister Thomas de Maiziere — who had been due to attend the match with Merkel — later said the event was cancelled “to protect the population”, but did not provide specifics.