The exercise will also simulate a wave of Palestinian suicide bombings.
"We will be exercising the doomsday scenario of simultaneous strikes against Israel on all fronts and by different means," Shlomo Dror, a defence ministry spokesman, said last week.
On Tuesday, air-raid sirens will sound across the country and Israelis must scramble to shelters, in some areas within seconds and others within no more than three minutes.
The exercise, code-named Turning Point 3, will also simulate the conduct of rescue and medical services during earthquakes and epidemics.
There will be simulated cabinet meetings in which ministers will weigh their response to the drill's scenarios.
This is the third consecutive year Israel has conducted defence drills.
The manoeuvres began in the aftermath of the July-August 2006 war with Hezbollah in Lebanon, which revealed major weaknesses in how Israel dealt with the rocket attacks on its territory.
"The Second Lebanon War revealed that the homefront was not well prepared for war and citizens found it hard to adapt to the special situation," Dror said.
Al Jazeera's James Bays, on the Lebanese border with Israel, said: "Israel said that this is something that was planned a long time ago. But on this side of the border, people are very suspicious.
"And that is because of the timing. In just seven days' time, the Lebanese go to the polls. Opinion polls show that the race is very tight.
"But at the moment, slightly in the lead are the Hezbollah-led opposition. Israel has already said that if the opposition becomes the new government, they will consider that government the enemy."
Turning Point 3 comes just two weeks after the Israeli air force wrapped up a four-day exercise testing its ability to defend against strikes from Syria and Iran.
Israel believes Iran is developing nuclear weapons and has not ruled out a military strike on the country in response.
Iran says its nuclear programme is only for energy production.
Jacky Rowland, Al Jazeera's Jerusalem correspondent, said that while Israel claims that the drill has "no special significance", it is likely to be seen in the context of "Israel's sabre-rattling towards Iran and also towards other neighbouring Arab countries".
"It was only a couple of weeks ago that Prime Minister [Binyamin] Netanyahu was in Washington and he was really pushing the question of Iran and its perceived nuclear threat really to the top of the agenda of his talks with President [Barack] Obama," she said.
"So, although Israel is saying that this is a defensive drill and it is really practising its ability to defend its civilians against attack from outside, inevitably it has to be interpreted by Israel's Arab neighbours - and indeed the Palestinians of Gaza and the West Bank - as a warning, a not so subtle warning of Israel's offensive capacities to strike should these circumstances arise."