Government spokesman Shimeles Kemal told AFP that those detained had been trained by the militants in Somalia and were planning a series of attacks in Jimma, about 305 kilometres (189 miles) southwest of the Ethiopian capital and where the arrests were made.
"About 25 people have been apprehended on suspicion of organising an underground terrorist cell," he said, adding that "a number of weapons" were also seized and the suspects likely to be charged.
Ethiopia, which shares a 1,600 kilometre border with Somalia, sent troops into the country in 2011 to help African Union and Somali defence forces fight the Shebab. It currently has around 4,500 troops in the country and has spearheaded a recent offensive against the Islamists.
Neighbouring Kenya has been a frequent target of attacks by Shebab rebels, who have demanded that Kenyan troops leave Somalia and claimed responsibility for last year's attack on the Westgate shopping mall in Nairobi that left at least 67 dead.
Uganda and Djibouti, both contributors to the AU force in Somalia, have also been attacked by the Shebab.
The US and British embassies have upgraded their travel warnings for Ethiopia in recent weeks, alerting visitors and residents to an increased threat of attacks.
Shimeles said while Ethiopia "has been and will remain vulnerable to terrorist attacks," the threat has not necessarily increased.
"I don't think that there is a special risk that warrants an extraordinary alert," he said.
Shebab leaders have vowed to attack Ethiopia to avenge the presence of its troops in Somalia, and last October two Somali nationals blew themselves up while crafting a bomb in Addis Ababa, which police said they planned to detonate at a crowded football match.