TOYAKO, Japan (Reuters) - Russia will consider how to retaliate over a planned U.S. missile shield but wants to continue talks on the issue with Washington, President Dmitry Medvedev said on Wednesday.

Washington and Prague signed a deal on Tuesday to place a tracking radar in the Czech Republic as part of a system the United States says is needed to protect against any missile attack from countries such as Iran.

Russia is sensitive to any Western military build-up near its borders and says it considers the U.S. missile shield plans a direct threat to its security.

"We are extremely upset by this situation," Medvedev told a news conference on the northern Japanese island of Hokkaido, where he was attending a summit of the Group of Eight leaders.

"We will not be hysterical about this but we will think of retaliatory steps," he said, but did not specify what measures Russia might take.

Secretary of State Condoleezza Rice called Russia's response "predictable, if disappointing."

"I still hope that Russia will look at the actual threat environment, look at the fact that the Iranians are developing ever-longer ranges of missiles which they apparently intend to test and that the Russians will see that this is not aimed at them," Rice told a news conference in Sofia.

Iran, suspected by the West of developing nuclear arms, test-fired 9 missiles on Wednesday and said it was ready to retaliate if the United States and Israel attacked. Speculation Israel could strike has mounted since its air force staged an exercise in June that U.S. officials said involved 100 aircraft.

Previous president Vladimir Putin proposed to Washington and NATO last year to set up a joint system of early warnings to trace any potential launch from the volatile South. Moscow offered use of a radar station it hires in ex-Soviet Azerbaijan.

"There has been no reaction," Medvedev said. "They are conducting sleepy talks with us and that means that the (U.S. shield) idea will be realized."

"It is completely obvious that, after the signing of the agreement, a new stage in implementing the idea of the missile shield has started," he added.

UNEASY RELATIONS

The missile shield dispute is one of a complex of disputes between the United States and Russia.

Rice was due in the Georgian capital, Tbilisi, on Wednesday for a visit Moscow will be watching closely. Tensions between Moscow and Tbilisi are rising over the Russian-backed separatist regions of Abkhazia and South Ossetia.

Putin, who handed over powers to Medvedev in May and is now his prime minister, warned in 2007 that Russia could aim missiles at European countries if the U.S. missile shield plans went ahead.

Russian generals have threatened to deploy tactical missiles in neighboring Belarus and to resume production of short and medium-range nuclear missiles in response to Washington's missile defense plans.

But Medvedev, who met President George W. Bush on the sidelines of the G8 summit on Monday, said dialogue on the Missile Shield issue should not be stopped.

"We are not closed to further negotiations and we will continue these," he said.

Medvedev and Bush, who will hand over powers to a successor after elections in November, agreed at a meeting in Japan that maintaining dialogue and close ties between the leaders was important both for the two states and for the global stability.

"I think we are leaving a very strong relationship," Secretary of State Condoleezza Rice said in Bulgaria.

"But it's a complicated relationship because whenever you have a relationship this big, and with this many elements, there are going to be elements both conflict and cooperation, and both are evident in the relationship with Russia."

(Editing by Ralph Boulton)

(Additional reporting by Arshad Mohammed in Sofia)

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