By Adrian Croft and Aija Krutaine

ADAZI, Latvia (Reuters) - NATO is staging its biggest military exercise in seven years this week in the Baltic countries and Poland but its insistence that the drills are not aimed at sharpening defences against a resurgent Russia have not convinced Moscow.

NATO says the exercise, involving 6,000 soldiers from the alliance as well as non-members Sweden, Finland and Ukraine, is based on a fictional scenario in which troops from the imaginary state of Bothnia invade Estonia in a crisis sparked by competition for energy resources and economic collapse.

But Russian officials see the exercise close to their western border as confirming fears that NATO's expansion since the end of the Cold War would lead to the allies flexing their muscles in Moscow's backyard.

The exercise comes soon after much larger Russian manoeuvres with Belarus in September that alarmed the small Baltic states, although NATO insists there is no link.

Some NATO diplomats are puzzled by Russian plans to sharply increase defence spending when most Western arms budgets are being slashed to face economic problems.

NATO Secretary-General Anders Fogh Rasmussen said the exercise, dubbed "Steadfast Jazz", was not intended to send a signal to any particular country.

"Of course it is a signal to anyone who might have any intention to attack a NATO ally, but I don't expect Russia to have any intention to attack NATO allies, so the Russians shouldn't be concerned. So you might say it is a signal 'to whom it may concern'," he told a news conference in Latvia.

OBSERVERS

Russia and NATO agreed to send observers to each other's manoeuvres, but this did not dispel concern in Moscow about an exercise that is intended to test the central article in NATO's founding treaty, committing all allies to defend a member under attack.

"This is an Article 5 scenario right on our border. Of course it provokes all sorts of questions on our side as to the aim of the exercises," a Russian diplomatic source told Reuters last month.

The three Baltic states - Estonia, Latvia and Lithuania - were former Soviet republics that joined NATO and the European Union after the collapse of the Soviet Union.

The presidents of all of them visited the drills, headquartered in the Latvian town of Adazi near the capital Riga, on Wednesday.

Western officials say the exercise is designed to test the ability of NATO's rapid reaction force to respond to a complex crisis on its northern borders.

The November 2-9 drills, which include a live fire exercise in Poland on Thursday, is also intended to measure NATO's ability to deal with "high-intensity warfare", a refugee crisis and terrorist threats all at the same time, while testing ballistic missile and cyber defence capabilities.

Latvian Defence Minister Artis Pabriks told reporters there had been an increase in hacking attempts on web sites in Baltic countries over the last few days, coinciding with the exercise and originating from an unidentified country.

"We know of both civilian targets and state and other institutions which experienced attempts to hack ... They (the cyber attacks) are largely of foreign origin," he said, without elaborating.

Estonia's internet network was paralysed in 2007 by an electronic attack that it blamed on Russia.

(Additional reporting by Gabriela Baczynska in Moscow; editing by Barry Moody)