A raid on a bar in the Tiger's Bay area of north Belfast was aimed at the loyalist paramilitary group the Ulster Freedom Fighters, police have said.
Police wearing gas masks returned to search the bar
DS Roy McComb said police acted on information suggesting a rehearsal for a "show of strength" was in progress.
He said tactics - which included firing CS gas pellets into the Alexandra Bar - were used in the belief that the men were armed.
The 17 men arrested in the raid are being held under the Terrorism Act.
They are being questioned about membership of a banned organisation and having items of use to terrorism.
"Information presented itself that illegal members of an illegal organisation with illegal firearms were going to present themselves as some sort of defenders of the people," Mr McComb said.
It is believed that half of those arrested were dressed in combat style uniform, but police have not yet revealed if anything, including weapons, were retrieved from the bar.
A full-scale search searches continued on Friday with police officers coming and going from the pub wearing gas masks.
The UFF is part of the Ulster Defence Association, set up as its "military wing" before the UDA was proscribed.
The police operation began just before 2000 GMT on Thursday.
Bar doors were ripped off their hinges and some upstairs windows in the bar were smashed during the raid.
It is understood that one of those arrested is already facing terrorist-related charges.
A bin lorry was set on fire in the vicinity of the bar
Sammy Duddy from the Ulster Political Research Group, which provides political analysis for the UDA, criticised the operation.
He said tensions were running high in the area following the raid.
On Friday, a lorry was set on fire near the pub.
Two council workers were told to get out of the vehicle and the cab was set alight.
A short time earlier, there was an attempt to hijack a taxi on Glenrosa Link but the driver managed to get away.
North Belfast DUP MP Nigel Dodds said local people had been "stunned" by what had happened.
"We were getting reports of bangs in the area, and there was even a rumour of fatalities," he said.
"Thankfully, that was not the case."
The police fired "irritant rounds" during the raid but not live rounds.
In a statement, the Police Service of Northern Ireland said irritant rounds contain CS gas which produce a "high density smoke".
A large crowd of people from the area gathered at the police cordon during the operation.