The exercise, which involves more than 300 people from police, fire, defence and government agencies, is also being run in Raglan.
It started in Dunedin yesterday, and will run 24 hours a day until noon on Friday.
Police Deputy Commissioner Rob Pope said the exercise had been planned over "many months" and was designed to realistically test the groups as if there was a national security threat.
"It is not to suggest that New Zealand's security risk level has been heightened, but we need to train to an appropriate level to test our counterterrorism capability."
It was a government requirement that agencies were ready for a terrorist attack, should it occur.
Agencies involved include the police, defence, customs, biosecurity, maritime safety, immigration, Ministry of Foreign Affairs and Trade, Ministry of Agriculture and Fisheries, the fire service and health agencies.
He could not elaborate on what the exercise involved, but said it would cause minimal disruption to Dunedin residents.
Most of the action would take place in central Dunedin and the harbour area, with some activities understood to be on Quarantine Is in Otago Harbour.
"Residents in the areas involved may see emergency service personnel and vehicles, including helicopters, at various times throughout the exercise."
Mr Pope said detailing what was to happen in the exercise would defeat its purpose.
Exercises such as this had been held throughout the country in recent years, but he could not recall one of the same magnitude in Dunedin.
