Such a scenario, said Panetta, would "paralyze and shock the nation" and be equivalent to a "cyber Pearl Harbor." (See video of Panetta setting out the scenario.)
The Department of Defense has an interest in stirring up fear of online attacks -- it wants to remain involved in cyber defense.
Over the last few years, the U.S. has developed the world's most sophisticated system to detect and prevent cyber attacks, Panetta said. He then set out why he believes the Department should be involved in national cyber security.
Panetta first addressed one of the biggest issues surrounding increased military involvement with the Internet: the possibility that the Department of Defense would monitor personal e-mail and communications between U.S. citizens.
"That it not our goal, that is not our job, that is not our mission," he said. "Our mission is to defend the nation. We defend. We defer. And if called upon, we take decisive action to protect our citizens. In the past we have done so through operations on land and at sea, in the sky and in space. In this century, the United States military must help defend the nation in cyberspace as well." (See video of Panetta pledging not to monitor the communications of U.S. citizens.)
To do this, Panetta said the Department of Defense in investing more than $3 billion per year in developing new capabilities to fight cyber attacks and said the U.S. has the capability to go on the offensive when required.
"If we detect an incoming attack that will cause significant physical destruction in the United States, or kill American citizens, we need to have the option to take action against those who would attack us, to defend this nation when directed by the president" Panetta said. "For these kinds of scenarios, the department has developed the capability to conduct effective operations to counter threats to our national interests in cyberspace."
"Let me be clear, that we will only do so to defend our nation, to defend our interests, to defend our allies. And we will only do so in a manner that is consistent with the policy principles and legal frameworks that the department follows for other domains, including the law of armed conflict," he said. (See video of Panetta's remarks on when the military would get step in to defend the national Internet.)