The group of about 40 hooded men were seen at Artarmon station just before midday on Friday.
After boarding a train, the group was stopped at North Sydney station by more than 20 police officers.
Police in North Sydney have detained a group of flag-waving men in balaclavas who swarmed a train. (Brent Lewin/AAP PHOTOS)
Passengers not involved with the group were evacuated, a spokeswoman for Transport for NSW said.
Australian neo-Nazi leader Thomas Sewell was part of the group stopped by police.
The 30-year-old self-appointed leader of the National Socialist Network was filmed being served by officers with a legal order banning him from attending any Australia Day events in Sydney.
The video, first posted by Sewell on his encrypted chat on Friday afternoon, was widely circulating across social media,
"You're being served with a public safety order," an officer tells Sewell in the video.
"I believe your presence in the Sydney City local government area poses a serious risk to public safety," the officer adds.
"This is based on your ideological links, including your associates, your previous attendance and ideologically motivated public order incidents, your criminal history of assaulting members of the public and your goal of intimidating and provoking people."
Sewell is then told to remain out of the Sydney City local government area or anywhere where an Australia Day event is planned until 11.59pm on Friday.
"So we're not allowed to celebrate Australia Day?" Sewell asks the officer.
A group of men dressed in black swarmed a train in North Sydney brandishing Australian flags. (HANDOUT/SUPPLIED)
NSW Premier Chris Minns responded, saying "normal people don't celebrate Australia Day with a balaclava on" in a statement on Friday.
"Due to great police work millions of Aussies were able to celebrate and come together without a potentially ugly confrontation.
"There is absolutely no tolerance for this behaviour," Mr Minns said.
As of 4.30pm on Friday a NSW Police operation was still underway.
"The men are being taken off the train, but slowly," a NSW Police spokeswoman told AAP.
Sewell admitted to attacking a group of hikers in a Victorian state park in May 2021.
He was among a group of far-right National Socialist Network and European Australian Movement members who set upon a group of friends hiking in the Cathedral Ranges State Park.
On Friday morning, Sewell posted a photo of a recently vandalised statue of Captain Cook in Melbourne to X, formally known as Twitter.
"A day before our National Day, anti-White scum cowardly tore down a Statue of one of the greatest sons of the Anglo Saxon Race - Captain Cook," he wrote.
"We will respond, and the world will know, that there are White men in this land who are still worthy of being called - Australian."
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