The alliance says the drills will focus – for the first time – on “high-end warfare” as Nato strengthens its deterrence towards Russia.
About 3,200 troops and 30 ships are war-gaming a “realistic scenario” in which Nato is under threat.
The drills come as the alliance makes preparations for a massive workout in 2024 called Steadfast Defender.
It simulates a US intervention in Europe if Nato triggers its Article 5 mutual defence clause.
The 2024 exercise could involve as many as 40,000 troops and 500 to 700 air combat missions, alliance officials told the Financial Times, making it one of its biggest drills since the end of the Cold War.
Finland and Sweden turned a page on decades of military neutrality to seek Nato membership after Russia attacked Ukraine.
“Russia’s war of aggression against Ukraine has radically altered the security situation in the Baltic Sea,” said Nato spokesman Dylan White.
“Exercises like these send a clear message that Nato stands ready to defend every inch of allied territory.”
The exercise is primarily taking place off the coasts of Latvia and Estonia, two Baltic states that have demanded a tougher posture towards Russia.
While previous exercises focused on piracy and terrorism, defence chiefs now want to focus on protecting Nato’s north-eastern flank from attack.
The drills are being led from a German naval command post and involve the US, France and Poland.
Troops are training in amphibious operations, air defence, sea-to-land strikes and the securing of sea lanes, Nato said.
Vice Adm Jan Christian Kaack, the chief of the German navy, said the drills were “so important for the Baltic Sea countries” as they seek protection from Russia.
“Above all, ensuring this protection means exercises, presence, and permanent vigilance – together with our partners in Nato and the EU,” he said.