The Hebrew language newspaper Israel Hayom quoted the Israeli police as saying that the system, named Light Blade, is the first in the world to demonstrate operational ability to shoot down such balloons and drones.
Palestinians in Gaza have been launching attacks at Israel with incendiary balloons and kites, which usually cause fires in the fields in southern Israel's settlements.
Drones carrying several types of explosives have also been launched into Israel in the past.
This led the Israeli police, together with the Israeli army and three civilian electro-optic experts, to develop this system, the report said.
After an incendiary balloon is detected, the system will lock it down and shoot it with a unique laser beam. In the case of a drone, the system could burn parts of it to bring it down.
The Israeli police said the system does not endanger other airborne factors in the target area, adding that the low cost of the system will enable rapid deployment.