Police counter-terror unit Detachment 88 stormed two separate addresses on Bali, in the capital Denpasar and at a hotel in Sanur, on Sunday night, Australian media said, quoting Australian Associated Press (AAP).
Three men were killed at the hotel in Sanur, an area popular with foreign tourists, and two at the Denpasar location.
AAP quoted police as saying the raids had been linked and that those killed had resisted arrest or tried to escape.
Firearms and ammunition were recovered from both addresses, but Bali Police spokesman Hariadi declined to say if any explosives had been discovered.
AAP quoted another senior police officer as saying, on condition of anonymity, that it was possible the group had been planning to carry out attacks on Thursday, the eve of Nyepi, or the annual Day of Silence marking Bali's Hindu New Year.
Balinese traditionally hold large parades on the eve of Nyepi, which also draw large numbers of tourists, AAP said.
The killings follow the start of a trial last month of an Islamic militant accused of making the bombs used in the 2002 Bali nightclub attack, many of the Australians.
Umar Patek, who was captured in the same Pakistan town where U.S. forces killed Osama bin Laden, is also accused of mixing chemicals for 13 bombs that detonated in five churches in Jakarta on Christmas Eve, 2000, and killed around 15 people.
Security officials say he belonged to the banned Jemaah Islamiah group linked to al Qaeda.
The Bali bombs were a watershed for Indonesia, which has the world's largest Muslim population, forcing the secular state to confront the presence of violent militants on its soil.
