Bali is on high alert in the wake of "credible" information about a plot to attack dignitaries, including Australian Prime Minister Julia Gillard, at a service to mark the 10th anniversary of the 2002 bombings in Kuta.
Authorities raised Bali's threat alert to the highest level on Wednesday, just 24 hours before Ms Gillard and Indonesian President Susilo Bambang Yudhoyono were set to arrive on the island for a commemoration ceremony on Friday.
Bali's Deputy Police Chief Brigadier General Ketut Untung Yoga Ana confirmed on Wednesday morning that intelligence reports had pointed to a plot to attack the service, to be held at the Garuda Wisnu Kencana Cultural Park in Jimbaran.
He added that Ms Gillard was a potential target.
"(She) is a very important person," Brig Gen Yoga Ana said.
"From the information we have gathered, there is an indication of a certain movement of (suspected terrorists) that plan to target VIPs who will attend the event."
"Based on credible information, the terrorists have planned to target the Bali bombing commemoration event with a terror attack."
Earlier, Bali Police Chief Inspector-General Budi Gunawan said the alert level had been raised in response to information gathered by intelligence officers.
"We need to be alert and aware on the terrorist threats targeting on VIPs," he said.
"It's better not to underestimate (the threat)."
Security has been ramped up around Jimbaran and in Kuta with more than 1500 police and military personnel, including snipers, to be deployed at various locations.
Despite the threat, Ms Gillard said she would not be discouraged from attending Friday's ceremony.
"I do want to be in Bali for the 10-year commemorations," Ms Gillard told reporters in Canberra.
"Families will be travelling there. It will be a day in which we will pay our respects and remember what that moment was like for Australians."
Australian Opposition Leader Tony Abbott and former prime minister John Howard were also set to attend the service, along with hundreds of survivors and families of those killed in the 2002 attacks.
The 2002 bombing of Paddy's Bar and the Sari Club in Kuta left 202 people dead, including 88 Australians, and injured scores more.
There will also be increased security at a separate memorial service to be held later on Friday at "ground zero", across the road from the former Sari Club site.
"We have prepared to face such a threat and we are still following the people involved," Brig Gen Yoga Ana said.
"We are confident we can secure the event."
A spokesman for the Department of Foreign Affairs and Trade said the Australian government was aware of reports of a potential threat.
The DFAT travel advice was not immediately updated. It continued to suggest that Australians "exercise a high degree of caution" while travelling to Indonesia.
The latest threat comes after police shot dead a group of five suspected terrorists at two separate locations in Bali in March.
The terror cell, which had links to the group that carried out the 2002 Bali bombings, were believed to be planning a series of terrorist attacks on locations including Kuta, Jimbaran and Seminyak.