Four Yemenis and three other suspects including a Malaysian and an Indonesian were arrested ahead of Saudi King Salman's arrival in Kuala Lumpur.
The monarch is currently touring Asia with 25 princes in his entourage.
Saudi Arabia has been leading a military coalition against the Houthi insurgent group in Yemen for the last two years.
However, it is unclear what group - if any - the Yemeni nationals were aligned with.
A senior police source told news agency Reuters the four were believed to be Houthi insurgents. However, other sources say the suspects were linked to so-called Islamic State.
It is also unclear whether the other three arrested were part of the same group.
The seven suspects were arrested between 21 and 26 February - the day King Salman arrived in the Malaysian capital.
National police chief Khalid Abu Bakar told journalists the group were "planning to attack the Arab royalties during the visit in Kuala Lumpur".
"We got them in the nick of time," he said.
Police also seized multiple international passports from the four Yemeni suspects, along with 270,000 ringgit ($60,740; Â£50,000) in different currencies which they believe was meant to be channelled to the insurgent group.
Mr Abu Bakar told journalists the group "are also involved in distributing drugs".
The United Nations has said Yemen now faces the largest food insecurity emergency in the world, with an estimated 7.3 million people needing immediate help, while more than 10,000 people have been killed in the conflict.
King Salman was accompanied by a 600-strong delegation for his four-day visit in Malaysia.
It was the start of a month-long Asia tour, for which the monarch has packed 459 tonnes of equipment, including two Mercedes-Benz S600s and two electric lifts.
Malaysian police say they have foiled a planned attack on Arab royals by suspected militants from Yemen.