Moscow is already at odds with the West over its nuclear ties with Tehran but has sought to use its good relations with Iran to be recognised as a key mediator between the West and the Islamic Republic.
On Friday The Vedomosti business daily cited military sources as saying Iran that would buy 29 TOR-M1 systems designed to bring down aircraft and guided missiles at low altitudes.
The paper, calling it the biggest sale of Russian defence hardware to Iran for about five years, said Moscow and Tehran had already signed the contract.
Interfax news agency separately quoted a source as saying that the deal, which would also include modernising Iran's air force and supplying some patrol boats, was worth more than $1 billion.
The move, likely to irritate Israel and the United States, could strain Moscow's efforts to broker a deal between Iran and European negotiators aimed at breaking a deadlock over Tehran's nuclear programme.
Israel in particular is nervous about Iran's military potential after President Mahmoud Ahmadinejad said in October that Israel should be "wiped off the map" - comments condemned by Russia at the time.
Russia condemned Ahmadinejad's
Russia's Defence Ministry declined to comment on the deal. Officials at Rosoboronexport, Russia's state defence supplier, were not available for comment.
Western countries suspect Iran of seeking nuclear weapons under the cover of a civilian atomic programme, which Tehran denies, saying it wants only to generate electricity.
Russia has helped Iran build its first nuclear reactor and is preparing to commission it next year. Some in the West fear that Iran could use Russian know-how to make weapons.
The defence industry source told Interfax that there were no international restrictions on selling weapons to Iran.
"Moreover, practically all the weapons that Russia is delivering to Iran in the coming years are defensive rather than offensive in character," the source said.
"Russia has long positioned itself as a major peace broker between Iran and the West - and all of a sudden they are throwing this bombshell"
One Western diplomat who monitors dealings between Russia and Iran said news of the deal was alarming and would further increase tensions.
"Russia has long positioned itself as a major peace broker between Iran and the West - and all of a sudden they are throwing this bombshell. It just does not make any sense," said the diplomat, who asked to remain anonymous.