About 20 people, including women and students, were on a route 57 tram on Thursday at the time and it took police an hour to contain the men following a tense stand-off.

A passenger told radio station 3AW those on the tram were "absolutely terrified" by the ordeal.

"The men were threatening to kill other passengers and were spitting on people," caller John told host Tony Jones. "Their behaviour was absolutely disgraceful."

He said the men were of African appearance and were aged in their 30s or 40s. The men were carrying a machete, which they kept passing to one another.

He said other people on the tram were filming the incident, which occurred at about 11.30pm on Thursday.

A police spokesman confirmed on Friday that four men were arrested after they disembarked the tram near Erskine Street.

He said police attended the scene following reports of a man with a knife.

It is believed an argument broke out between a group of men while travelling on the tram about 11.45pm, the spokesman said.

The four men are all known to each other and aged between 40 and 53. One man was pepper-sprayed during the arrest, he said.

One of the men received penalty notices for being drunk and disorderly, possessing a controlled weapon and behaving in a offensive and insulting manner.

Two of the men each also received a penalty notice for being drunk and disorderly. At this stage, the fourth man has not received a fine. No one was injured as a result of the incident.

3AW caller John said it had been a harrowing experience.

"They attacked innocent people just wanting to go home," he said.

"To put up with that sort of stuff on public transport is unacceptable." 

One of the men fled the tram once police arrived, only to return minutes later challenging the officers to a fight, he said. The group also received backup with another man arriving on the scene and "abusing the police and wanting to be arrested," the eyewitness said.

He said one of the passengers had been bashed on a tram before and was already suffering from post-traumatic stress disorder prior to Thursday's ordeal.

It is not the first time passengers have been threatened on North Melbourne trams at night.

In May, a 47-year-old Good Samaritan's glasses were smashed after he stood up to another man abusing other passengers on a late-night route 59 tram.