The UK must strike back at hostile states in cyberspace and be capable of mounting sophisticated cyber-attacks of its own in place of military strikes, the chancellor has said.

Philip Hammond said that unless the UK could match the cyber-attack abilities of foreign rogue states, the alternatives would only be to ignore digital attacks on Britain’s infrastructure or use military force.

Launching the government’s £1.9bn national cybersecurity strategy, Hammond said the UK had to develop “fully functioning cyber-attack capability”.

He said: “If we do not have the ability to respond in cyberspace to an attack that takes down our power networks, leaving us in darkness, or hits our air traffic control system, grounding our planes, we would be left with the impossible choice of turning the other cheek and ignoring the devastating consequences or resorting to a military response.”

Hammond said the world’s next great conflict was likely to at least begin in cyberspace, before guns were loaded.

“There is no doubt in my mind that the precursor to any future state-on-state conflict will be a campaign of escalating cyber-attacks, to break down our defences and test our resolve before the first shot is fired,” he said in a speech on Tuesday at Microsoft’s Future Decoded conference.

Philip Hammond (@PHammondMP) New strategy will allow us to take greater steps to defend ourselves in cyberspace &strike back when we are attacked https://t.co/SRvlmlQtB5

Hostile states appeared to believe cyber-attacks were far less risky, Hammond said. “Kinetic attacks carry huge risk of retaliation and may breach international law, but in cyberspace those who want to harm us appear to think that they can act scalably and deniably,” he said.

Hammond said the new funding, which doubles the amount set out in 2011 in a similar strategy, will “allow us to take even greater steps to defend ourselves in cyberspace and to strike back when we are attacked”.

Speaking before the launch, the Cabinet Office minister Ben Gummer said cyber warfare was “no longer the stuff of spy thrillers and action movies ... Our adversaries are varied – organised criminal groups, ‘hacktivists’, untrained teenagers and foreign states”.

The funds will focus on defences for critical infrastructure such as energy and transport. Websites impersonating government departments will be shut down much more quickly, and efforts will be made to crack down on spoof email accounts used in fraud cases. The reforms include a new cyber-innovation centre in Cheltenham.

Hammond’s announcement came as Russia rebuffed claims made to the Guardian by the head of MI5, Andrew Parker, that the Kremlin was behind hostile manoeuvres against Britain.

Parker told the Guardian that Moscow was “using its whole range of state organs and powers to push its foreign policy abroad in increasingly aggressive ways – involving propaganda, espionage, subversion and cyber-attacks. Russia is at work across Europe and in the UK today. It is MI5’s job to get in the way of that”.

“Those words do not correspond to reality,” Dmitry Peskov, a Kremlin spokesman, said on Tuesday. “Until someone produces proof we will consider those statements unfounded and groundless.”