The Victorian-based group were travelling in convoy through southern Sydney, potentially to the scene of the shooting massacre at Bondi Beach, when tactical police rammed their cars and took them into custody on Thursday.
The men were arrested on suspicion they were plotting a violent act, detaining them under special counterterrorism powers.
But about 4pm AEDT on Friday, the men - aged between 19 and 24 - were released.Â
The NSW police commissioner earlier conceded there was likely not enough evidence to lay charges.
"The justification for their ongoing detention no longer exists," Mal Lanyon told reporters on Friday.
"If they haven't been charged, they're not subject to bail conditions ... we will monitor these men whilst they're in NSW."
Video shared on social media shows tactical operations officers carrying large weapons arresting several men at a busy intersection in Liverpool.
NSW Police usually cannot detain people without charge for longer than six hours for the purposes of an investigation.
But a magistrate approved a special warrant under counterterrorism laws, allowing the seven men to be held until Friday night without charge.
The men were believed to have arrived from Victoria on Wednesday and all were known to Victorian police, Mr Lanyon said.
No firearms were found in the cars, but one knife was seized.
One of the men was reportedly under the watch of domestic spy agency ASIO.
Police, acting on information from another agency, believe the men might have been planning to commit a violent act at a number of locations, including Bondi Beach.
"The potential of a violent offence being committed was such that we were not prepared to tolerate the risk," Mr Lanyon said.
A link of Islamic extremist ideology between the men was being investigated despite the full intentions of the group remaining unknown, the commissioner said.
He stressed there was no definitive link yet between the group and either Sajid or Naveed Akram, the father-and-son gunmen involved in the Bondi massacre.
Homemade Islamic State flags were found in a car registered to one of the gunmen.
The potential of the Bondi shootings to embolden other extremists was concerning but the speed of the police response was encouraging, the NSW premier said.
"(The police are) not mucking around and I don't think anyone in NSW wants them to muck around," Chris Minns said.
Opposition Leader Kellie Sloane said the events in Liverpool highlighted the job for police was not yet done.
"Our community is still vulnerable," she told reporters.
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