Ukraine's president says almost $3bn (£1.8bn) will be spent on re-equipping the army after an "exhausting" campaign against pro-Russian rebels.
Petro Poroshenko made the announcement ahead of a military parade to mark Independence Day in the capital Kiev.
Meanwhile, fighting continues in eastern Ukraine, where more than 2,000 people have died in recent months.
Pro-Russian fighters have marched dozens of captured Ukrainian soldiers through the city of Donetsk.
The city has been the scene of the heaviest fighting since the conflict erupted.
Crowds reportedly lined the streets chanting "fascists" at the prisoners.
'Constant military threat'
Speaking in Kiev, Mr Poroshenko said that a "constant military threat will hang over Ukraine" for the foreseeable future.
He said the investment would be spread out over two years, from 2015-2017.
"The events of the last months have for us turned into a real war, albeit an undeclared one," Mr Poroshenko said in a televised speech on Sunday.
"Over the last six months, a new Ukrainian army has been born in heavy and exhausting fighting."
The military parade featured hundreds of marching servicemen and military hardware. Critics said it was inappropriate when Ukraine was at war.
A naval parade is also being held in the port of Odessa.
These are the first military parades since 2009, when the previous pro-Russian president, Viktor Yanukovych, abolished them.
Prayers were said and wreaths laid for those who fought on the Ukrainian government side, including those killed during protests against Mr Yanukovych in Kiev last winter.
Separately, security officials quoted by Ukrainian media said that five people accused of planning attacks on bases for pro-government volunteers in the Kiev area, timed to coincide with the celebrations, had been arrested.
More than 330,000 people have fled their homes because of fighting in eastern Ukraine.
On Saturday, German Chancellor Angela Merkel urged both sides in the conflict to strive for a new ceasefire, after talks with Mr Poroshenko in Kiev.
She cautioned that Russia - already subjected to heavy EU and US sanctions over its alleged interference in Ukraine - could face further punitive measures.
Her visit to Kiev took place as lorries from an unauthorised Russian aid convoy which had crossed into eastern Ukraine returned to Russia.
Western officials fear the trucks may have held military equipment to help the rebels, but Russia said they had delivered generators, food and drinks.
The violence in the east erupted when pro-Russian separatists in the Donetsk and Luhansk regions declared independence from Kiev, after Russia annexed the Crimean peninsula from Ukraine in March.
Key negotiations between President Poroshenko, Russian President Vladimir Putin and EU officials are due to take place in Minsk on Tuesday.