By Dan Williams JERUSALEM, Feb 1 (Reuters) - An Israeli arms firm got the government's green-light on Thursday to develop a system that would shoot down short-range rockets of the kind favoured by Lebanese Hezbollah guerrillas and Palestinian militants. State-owned Rafael's "Iron Cap" system, which is expected to be ready for deployment in 2009, is designed to detect incoming Katyusha or homemade Palestinian rockets and fire miniature missiles to destroy them mid-air, Israeli security sources said. Defence Minister Amir Peretz announced the order in a statement, saying the system could "expand Israel's room to manoeuvre in diplomacy" -- a reference to possible future pullouts from occupied West Bank land where Palestinians seek a state but which Israel fears could be used to launch rockets. Israel quit the Gaza Strip, another Palestinian territory, in 2005 in a unilateral move. Gazan militants have kept up rocket salvoes, largely unimpeded by several bloody Israeli army sweeps of the launching grounds. While similar in appearance and range to Katyushas, the Palestinian rockets have seldom caused serious damage. But Israeli officials say the threat they pose will increase as the militants obtain better explosives and know-how. Security sources put Iron Cap's development cost at $240 million. Peretz pledged to earmark a budget for the system. Israel stepped up its efforts to bolster air defences after last year's war with Hezbollah, during which the Iranian-backed guerrilla group fired 4,000 rockets into the Jewish state. Israeli officials said the air force managed to hit many of Hezbollah's larger missiles on the ground, but proved largely impotent in the face of portable Katyusha rockets that were easily concealed and fired by guerrillas in the hilly frontier. Peretz's office said he also commissioned a system to shoot down medium-range Hezbollah rockets such as the Zelzal. That system, known as "David's Sling", is being developed jointly by the Israel's Defence Ministry and U.S. arms firm Raytheon. The Lebanon war showed up the shortcomings of Israel's offensive military tactics and sharpened domestic concern about how the country would fare in any future showdown with arch-foe Iran, which has long-range Shehab missiles. Israel, assumed to have the Middle East's only nuclear weapons, has vowed to stop Iran acquiring the bomb. Iran says its atomic ambitions are peaceful and has vowed to retaliate for any Israeli or U.S. attack on its facilities. Israel's Arrow II system, which uses guided missiles to shoot down incoming ballistic missiles at atmospheric altitudes, is considered its main bulwark against a salvo of Shehabs. "When deployment of the three systems is completed, I believe that the citizens of Israel will have perfect protection," Deputy Defence Minister Ephraim Sneh told Army Radio.
