Australia's largest postal fraud of $4.2 million has been uncovered by police with a licensee of a post office in central Sydney charged.

On Tuesday, NSW Police and the Australian Federal Police descended on the post office on Kent St, Millers Point and arrested the man and seized documents.

"It will be alleged the man was defrauding Australia Post in regards to monies paid to him for the alleged sales of postage stamps and envelopes sold through the branch," police said in a statement, reported by the Australian Associated Press.

The 43 year-old-man was refused bail to appeal in Central Local Court on 12 August.