"Only an insane person and only in a dream can imagine that Russia would suddenly attack Nato," Putin told Italian newspaper Corriere della Sera.
He also accused some European countries of "taking advantage of people's fears with regard to Russia" to receive military and financial assistance from Nato, in an apparent dig at former Soviet countries that are looking towards Nato.
The Western alliance has been beefing up security in its eastern European members in response to their concerns over what they consider Russian aggression, following its involvement in the Ukraine conflict.
Nato claims says Russia is backing rebels in Ukraine with weapons, equipment and manpower – a claim Russia denies.
Pentagon officials said on Friday the US was considering a range of moves to bolster security, including increasing missile defences or even deploying land-based missiles in Europe, according to the BBC.
In the interview, Putin stressed Russia merely sought to defend itself from outside threats.
He identified called to attention that Nato members have defence expenditures that are 10 times Russia's military spending, adding the US military budget was the biggest in the world.
In order to ensure a strategic balance, Russia will develop "systems to overpower anti-missile defences", Putin said.
"We have made significant progress in this direction," he added, without providing further details.
Heavy fighting has broken out once again in eastern Ukraine this week, around the towns of Maryinka and Krasnohorivka, west of rebel-held Donetsk.
Both sides accuse each other of breaking February's Minsk ceasefire, requiring them to withdraw heavy weapons from the frontline.
Ukraine's President Petro Poroshenko told a news conference on Friday that Russia had massed troops on the border and in rebel-held areas "in unprecedented numbers" – but Russia again denied that its military was involved in Ukraine.
Poroshenko said Ukraine has deployed 50,000 troops in the conflict zone to meet the threat.
Meanwhile, German leader Angela Merkel has defended the G7's decision to snub Russia from economic summit to be held this weekend in the Bavarian Alps.
"Russian participation is currently not conceivable," Mrs Merkel said in an interview with Germany's DPA news agency.
"The G7 is a group of states that share the values of democracy and rule of law," she said.
"According to our principles, we are defending international law and the inviolability of borders, because they are the foundation of our peace."
Russia has not been invited to what used to be the G8 annual summits since the annexation of Crimea last year.