DUBAI (Reuters) - Iran has built about 30 percent of a missile defense system it is developing in place of the Russian S-300 system Moscow refused to sell it, and hopes to complete the system by next year, a senior military official said on Monday.

Farzad Esmaili, commander of the army's air defense force, also reiterated that Iran will hold a large-scale air defense exercise in the next two months covering the whole country, the Iranian Students' News Agency (ISNA) reported.

Iran, under mounting pressure from Israel and Western powers over its controversial nuclear program, has unveiled upgrades to weapons systems and held several military exercises this year to demonstrate its ability to defend itself.

Israeli Prime Minister Benjamin Netanyahu urged world powers on Sunday to make clear to Tehran that they would not let it obtain nuclear arms. Israeli rhetoric has stoked speculation that Israel might attack Iran's nuclear sites, some buried deep underground, before the U.S. presidential election in November.

Western powers suspect Iran of trying to develop a nuclear weapons capability and have imposed several rounds of sanctions on it, but Tehran says its nuclear program is for purely peaceful purposes and refuses to suspend it.

ISNA quoted Esmaili on Monday as saying Iran would test its air defense systems in mid-to-late October or early November.

"We will use whatever we have in order to defend Iran," Esmaili said. "Today the main threat is an air threat, because it achieves quick results, therefore it was felt it was necessary that air defenses work independently."

"One of our missions is being vigilant over sensitive centers like refineries and nuclear sites," Esmaili said.

"A new, more advanced system with higher capabilities than the S-300 in detecting, identifying and destroying targets is pending," ISNA quoted Esmaili as saying. "About 30 percent of the work related to building the Bavar-373 has been completed and we will make efforts so that we can announce the completion of this project by next year."

Moscow refused to sell the sophisticated S-300 system to Iran on the ground that it would violate expanded U.N. sanctions imposed over Iran's nuclear program.

Iran announced in November 2010 that it had adapted another Russian-made missile system to perform more like the S-300, a precision, mobile, long-range air defense system that can detect, track and destroy ballistic missiles, cruise missiles, and low-flying aircraft.

Military experts have cast doubt on Iran's claims of weapons advances, especially regarding its missile program, saying they are often exaggerated.

On Sunday, deputy defense minister Mohammad Eslami said plans were afoot to install missiles on long-distance unmanned drones that featured in missile tests earlier this year.

Authorities say the Karrar drone, unveiled in 2010, has a range of 1,000 kms (625 miles) and can carry a single cruise missile or several smaller missiles.

(Reporting by Yeganeh Torbati, additional reporting by Marcus George, editing by Tim Pearce)