Police officers, soldiers, emergency services and intelligence officials are taking part in the exercise, which has been six months in the planning.
The exercise, codenamed Strong Tower, involves 1,000 police officers at locations across the UK capital until tomorrow afternoon.
Strong Tower comes days after 38 people were killed by a gunman in Tunisia, the majority of them British holidaymakers.
Metropolitan Police Commissioner Sir Bernard Hogan-Howe said it would test responses to extremists using firearms.
Sir Bernard said: "The reason we have exercises like today is because, obviously, we are concerned there are people planning terrorist events.
"We intend first of all to stop them from getting to attack. But should we not stop the terrorists in their planning, it's essential we disrupt them in any of the attacks that may take place."
Scotland Yard stressed this week's exercise in London is not based on any specific intelligence and is part of a long-term strategy of planning and preparing for all possible types of terror attack.
Senior officers say that while much of the exercise will be hidden from view, there may be occasions when the public hear loud noises or see areas being cordoned off.
Scotland Yard will be posting updates about the exercise to Twitter, using the hashtag #999exercise.
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