Short-range missiles were to be tested in the four-day exercise southeast of Tehran, which came soon after the US military dispatched a second warship to Gulf waters amid growing international tension over Iran's atomic programme.
Among missiles to be tested were the Fajr 5, which military sources have reported has a range of around 75km, and the Zelzal which is said to have a range of 100 to 400km.
Iran angers the west
EU foreign ministers in Brussels, meanwhile, deplored Tehran's lack of co-operation over its nuclear programme and vowed to fully implement UN sanctions, including asset freezes, trade stoppages and travel bans.
"Ground forces of Iran's elite Revolutionary Guards are completely ready to tackle any kind of foreign threats," Majid Ayeneh, commander of Iranian artillery, said.
Nicholas Burns, the US under-secretary of state, on Sunday said: "We leave all options on the table, but we are seeking a diplomatic solution to these problems."
Washington announced this month it was stepping up US military presence in the region by sending a second aircraft carrier to join one already in the Gulf, the first such buildup since the launch of the US-led war on Iraq in 2003.
In addition to ordering the deployment of the aircraft carrier USS John C. Stennis, the Pentagon announced that an air defence battalion equipped with Patriot missile defence systems would also go to the region.
Burns said mounting international pressure, including UN sanctions, has put the Islamic republic on the defensive, and pledged that Iran would face a second round of sanctions if it does not suspend nuclear activity in its main nuclear research centre in Natanz by February 21.
But Manouchehr Mottaki, Iran's foreign minister, told reporters on Monday that Tehran was "continuing building centrifuges [for uranium enrichment] and the International Atomic Energy Agency (IAEA) knows about it".
The UN Security Council passed Resolution 1737 in December, imposing sanctions on Iran because it has repeatedly refused to fully cooperate with the UN nuclear watchdog or suspend uranium enrichment.
In reprisal for the resolution, Alaeddin Borujerdi, the head of parliament's national security commission, announced Iran was blocking from the country 38 inspectors from the IAEA.
"This is the first step in implementing the parliament legislation" on limiting cooperation with the IAEA, Borujerdi said.
"The committee [in charge of implementing the parliamentary legislation] decided not to allow 38 inspectors to enter Iran and this restriction has been officially announced to the IAEA," he said.
IAEA inspectors regularly visit Iranian nuclear sites under the nuclear Non-Proliferation Treaty, to which Iran is a signatory.
Mottaki defended the move as "completely legal" and said that "IAEA member states have the right to oppose the trip of any inspector they wish".
Iran, Opec's second largest oil exporter, insists its nuclear programme is aimed solely at meeting peaceful energy needs. However, the West fears that it could be diverted towards building a bomb.
Following talks in Brussels, EU foreign ministers made a political declaration that paves the way for EU legal experts to draw up the necessary legislation for the UN resolution to be implemented.
The foreign ministers "deplored Iran's failure to take the steps repeatedly required by the IAEA board of governors and the United Nations Security Council".
They agreed to halt trade in nuclear-related goods with the Islamic republic, freeze the assets of those linked to the programme and impose targeted travel bans.
But Iran has remained defiant on sanctions as Mahmoud Ahmadinejad, the country's president, said last week: "Even if they adopt 10 other resolutions it will not have any effect."