Shaul Mofaz, the Israeli defence minister, said that in light of Iran's threats against Israel and efforts to develop non-conventional weapons, Israel needs an effective shield.
"The state of Israel, which is a clear target of each of these missiles and of the production stations of Iran's non-conventional weapons, reserves the right to have other capabilities to prevent this threat," he said.
The Shahab-3 can be equipped with nuclear warheads, and Tehran has said the missile could reach Israel and various US military bases in the Middle East.
Last month, the European Union accused Iran of having documents that show how to make nuclear warheads, and joined the US in warning Tehran that it could face referral to the UN Security Council for possible sanctions.
State-owned Israel Aircraft Industries and US-based Boeing Co began developing the Arrow system after Iraq fired 39 Scud missiles at Israel during the 1991 Gulf war.
A Shahab 3 missile on display at
a military parade earlier this year
The test on Friday was carried out at an air force base in central Israel. It was the 14th test of the system, and the first trial since a failed test-firing last year.
Israel considers Iran to be its biggest threat, and does not believe Tehran's assertion that its nuclear programme is peaceful. Israeli concerns were heightened recently after Iranian President Mahmoud Ahmadinejad urged that Israel be "wiped off the map".
On Thursday, Ariel Sharon, the Israeli prime minister, said he was confident that all diplomatic efforts to defuse Iran's nuclear programme would be exhausted before military action is taken, but he also said that military capabilities do exist.
Asked if any country was considering a strike against Iran to prevent it from developing nuclear weapons, Sharon said: "I am sure that before anyone goes to take such steps, all attempts will be made to pressure Iran to stop all this activity."
Although Israel is preparing for the possibility that Iran will acquire nuclear weapons, it will not lead the fight against the country's nuclear ambitions, he said.