"We are now preparing all the necessary documents," said Chemezov, whose company includes arms exporting monopoly Rosoboronexport.

"We should return them all the funds," he said. "Of course, they are not very pleased. We do not have a choice."

Chemezov said it was unlikely Russia would return the money by the end of the year, however. He estimated the entire contract at around 800 million dollars (572 million euros).

Iran has threatened to sue over what it regards as a breach of contract.

Chemezov said "we have annulled the contract and are returning the advance payment," which he said was 166.8 million dollars (119.3 million euros).

"In accordance with a provision of the contract on force majeure circumstances we are under obligation to return this advance amount which we have received.

"We are under no obligation to return anything else. We are not talking about any other compensation."

Russia had come under strong US and Israeli pressure not to go ahead with the sale of a weapons system that was seen as greatly complicating any military action against Iran.

Both Israel and the United States have refused to rule out a 166resort to military action to prevent Iran acquiring a nuclear weapons capability, an ambition Iran strongly denies.

Chemezov was in Cyprus accompanying President Dmitry Medvedev on a first ever visit to the Mediterranean holiday island by a Russian head of state.

The UN Security Council adopted a fourth set of sanctions against Iran on June 9 over its failure to heed repeated ultimatums to freeze uranium enrichment, the sensitive process that produces fuel for nuclear reactors or in highly extended form the fissile core of an atomic bomb.

Russia was critical of subsequent decisions by the European Union and the United States to impose additional sanctions of their own but has vowed to implement the UN package in full.

Medvedev signed a decree last month banning supplies of S-300 missiles and other arms to Iran in a long-awaited move after weeks of deliberations by Russian officials.

Under the decree, supplies of any tanks, fighter jets, helicopters, ships and missile systems are forbidden.

Russia will also not supply Iran with any technologies related to ballistic missiles capable of delivering nuclear warheads. The decree also bans the transit of arms bound for Iran through Russian territory.

In addition, Iranian citizens or companies will not be allowed to invest in any activities in Russia related to production of uranium.

The decree will not mean a complete halt to all military cooperation between Moscow and Tehran, Deputy Foreign Minister Sergey Ryabkov told Russian reporters in New York last month.

"We did not add anything to the list (of banned items), but on every point there we will have no further military cooperation with Iran. However, there are other forms (of military cooperation still allowed)," Russia's RIA Novosti news agency quoted Ryabkov as saying.

Russia's tougher line on Iran has coincided with a warming of its relations with the United States. Washington has repeatedly praised Moscow for its support in the nuclear standoff with Tehran.

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