Many went to the beaches to watch the show or gathered on their apartments' verandas or tall buildings to have a peek.
This year's flyover included for the second time a fleet of US -made F-35I jets.
Israel has also reduced its air force's participation in an exercise in the United States next month, with army radio reporting the decision was due to the tensions.
The six-week demonstration, which started on 30 March for Land Day and is set to end on Nakba Day on 15 May, calls for the return of the small coastal territory's 1.3 million refugees to their original villages.
Following a solemn remembrance of Israel's fallen on Wednesday as part of Memorial Day commemorations, Israelis kicked off celebration.
An official opening ceremony in Jerusalem's Mount Herzl marked the country's 70th anniversary with an annual theme of "between tradition and innovation". Some 6,500 Israelis and guests turned out for the torch-lighting ceremony, also the largest to date.
"Our hand is outstretched in peace to all of our neighbors who want peace", Netanyahu said.
Trump overturned decades of US policy a year ago by announcing the USA would move its embassy from Tel Aviv to Jerusalem.
Singers and artists performed in open-air concerts across the country throughout the night, with fireworks going off in the background.
The Defence Ministry said guards at the Reihan checkpoint in the northern West Bank found a "powerful explosive device" hidden in the roof of a Palestinian truck loaded with other goods.
U.S. President Donald Trump issued effusive congratulations to Israel on the occasion of the country's 70th anniversary, saying the United States has "no better friends anywhere", and reiterating his pledge to move the American embassy from Tel Aviv to Jerusalem.
Hundreds of thousands of Palestinians, who lived in this region, became refugees in the ensuing battles.
The embassy move has deeply angered the Palestinians, who see the Israeli-annexed eastern sector of the city as the capital of their future state.