Russia's decision to block the deal followed intense pressure by the West as it tries to get more transparency from Iran about its controversial nuclear program. The contract concerns the S-300 state-of-the-art anti-aircraft system, which Western and Israeli officials have long suggested that Iran could reverse engineer, if supplied with by Russia.
"According to the S-300 contract, our country should take legal action in accordance with the contents of the deal in a bid to restore the inalienable rights of the Islamic Republic of Iran," said Kazem Jalali of the Iranian parliament's national security and foreign policy commission.
Clearly responding to international pressure, Russian President Dmitry Medvedev decreed the ban, nearly five years after Moscow sealed the deal with Tehran.
Medvedev's about-face came after senior Russian officials had reassured Tehran that the deal would go through despite fresh sanctions imposed by the United Nations. At the time, Tehran also threatened to proceed with the construction of its own home-made anti-missile aircraft.
It remains unclear how the Islamic republic will proceed and what further action it will take against Russia.
Over the weekend, senior military and technology officials escorting the Russian president during his first official trip to Cyprus said that the Kremlin was preparing to reimburse Iran for the scuppered deal.
Sergei Chemezov, head of the state-owned Russian Technologies has said funds Iran paid for the S-300 should be returned. But, he said, it was unlikely Russia would return the money by the end of the year, estimating the entire contract as about $800 million. The Tehran Times said Iran made an advance payment of about $167 million.
Military analysts have said that deployment of the S-300 missile system would have created problems in any potential war designs against Iran.
The United States and Israel opposed the sale of the system, which can destroy multiple aircraft and missiles at a range of about 100 miles and altitudes of up to 20 miles. It is able to simultaneously track up to 100 targets.
"If Israel wanted to take out Iranian nuclear facilities, it would have to be done before the S-300s were installed," The Moscow Times reported. "A sale would have essentially started the countdown to an Israeli attack."
Neither the United States nor Israel have ruled out military action if diplomacy fails to resolve the nuclear program spat which Tehran has repeatedly said serves civilian power generation purposes only.