The Chancellor will issue the stark warning about Islamist militants using deadly online attacks on Britain's infrastructure and pledge to tackle cyber crime with an additional £1.9bn a year by 2020.
Islamic State has demonstrated its ability to exploit cyberspace to spread propaganda and plan terrorist attacks, he will say, and it is to be expected the group will one day target utilities and air-traffic control.
"They have not been able to use it to kill people yet by attacking our infrastructure through cyber-attack.
"They do not yet have that capability. But we know they want it, and are doing their best to build it.
"So when we talk about tackling ISIL, that means tackling their cyber threat as well as the threat of their guns, bombs and knives.
"If our electricity supply, or our air traffic control, or our hospitals were successfully attacked online, the impact could be measured not just in terms of economic damage but of lives lost."
It comes as David Cameron promised the Government would spend an extra £2bn on the UK's Special Forces to fight terrorism, in the wake of the Paris attacks at the weekend that left 129 people dead.
The money will not go on recruitment but will fund new weapons and vehicles, including helicopters.
It will also help buy protective equipment and communication systems.
It is a significant increase in spending on the UK's specialist soldiers and reflects the growing threat of terrorism in the UK.
Mr Osborne is to give details of the cyber crime investment during a visit to the GCHQ listening station in Cheltenham - including a new National Cyber Centre to bring together the country's leading experts.
"As a nation determined to live within our means, we are facing painful choices, and the hardest of decisions. You will see that next week," Mr Osborne will say.
"But the Prime Minister, my colleagues at the top of government and I have decided that we have to make a top priority of cyber security, if Britain is to be able to defend itself, now and in the future."
Meanwhile, French hackers from the activist group Anonymous have declared "war" on Islamic State after the Paris attacks.
In a video posted on YouTube, a representative wearing a hood and the group's distinctive Guy Fawkes mask said the violence that left 129 people dead "can't go unpunished".
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