NATO head Jens Stoltenberg urged the alliance Friday to brace for further challenges after a "black year" of Russian intervention in Ukraine and terror attacks on Europe's streets.

Unveiling NATO's 2014 annual report, Stoltenberg said a new rapid reaction force would help cope with a changing security environment but urged the 28 member states to keep their commitments to boost defence spending.

"2014 was not a good year for European security. In fact it was a black year," said Stoltenberg, the former Norwegian prime minister who took over as NATO Secretary General in October.

"Our security environment has fundamentally changed," he said.

He highlighted Russia's role in Ukraine as a key problem, saying it was defying international norms, destabilising the country and intimidating its neighbours.

Russia's increased defence capabilities including the ability to launch snap military exercises on a huge scale were "part of the reason why we have decided to change our defence posture", he said.

Stoltenberg also warned of the threat from the Islamic State and other extremist groups on NATO's borders, especially after the Paris attacks earlier this month in which homegrown jihadists killed 17 people.

"To the south, violent extremism is at our borders. Spreading turmoil across North Africa and the Middle East and fuelling terrorism on our own streets," he said.

The NATO chief said defence ministers meeting next week would finalise the list of countries taking part in a so-called "spearhead" quick reaction force which the alliance's leaders agreed at a summit in September.

Command and control centres would be set up in the Baltic states -- Estonia, Latvia and Lithuania -- plus Poland, Romania and Bulgaria to ensure the new force could hit the ground running within days in response to any threat, he added.

After years of cuts, NATO leaders also agreed at the September summit to boost defence spending to the equivalent of 2.0 percent of annual economic output within 10 years, largely driven by fears of a newly assertive Russia.

With the end of the Cold War, many allies took advantage of the 'peace dividend' to cut back, some to much less than 1.0 percent, and Stoltenberg warned that this was a false economy even if budgets are tight.

Russia had economic problems too, he noted, but that had not stopped Moscow.

"We have seen Russia over a period of many years increase their investment in defence despite financial problems" he said.

"We have seen that Russia is ready to use force," he added, citing Ukraine, and Georgia and Moldova, all former Soviet states which have turned to the West in defiance of Moscow.

Asked about possible contacts with Russia to help ease tensions, Stoltenberg said he was likely to meet Foreign Minister Sergei Lavrov on the sidelines of the Munich Security Conference next week, even though practical cooperation with Russia had been suspended.