JERUSALEM, April 10 (Ari Rabinovitch/Reuters) - Israel said on Sunday its new Iron Dome interceptor had successfully protected two major cities from Palestinian rockets fired from Gaza in the past few days, and other countries were already expressing interest.

The system was deployed last Sunday outside the Gaza Strip and had shot down eight rockets in mid-air with a ninth strike unconfirmed, an Israeli military spokeswoman said. Iron Dome was deployed days before the latest escalation in cross-border fire.

Israeli leaders said by blocking direct hits on urban centers, Iron Dome had created some extra room to maneuver and may have prevented a further escalation of tit-for-tat attacks.

But smaller towns closer to the border remain exposed to shorter-range fire and have been repeatedly hit. Israel has struck back hard with air and ground strikes in Gaza. Both sides indicated on Sunday they wanted to end the flare-up.

The technological achievement is most impressive, Israel has created a breakthrough, Prime Minister Benjamin Netanyahu said during a visit to the Iron Dome unit on Sunday in the coastal city of Ashkelon north of the Gaza Strip.

But he warned against complacency.

(Despite the success of Iron Dome) we will not be able to protect every house in Israel. We will continue to do much more but there will be a need to combine defensive and offensive capabilities, Netanyahu added.

Defense minister Ehud Barak said the system's success has deeply impacted Israel's ability to act operationally and to maneuver diplomatically against challenges, not just routinely, but also during much broader events.

Produced by state-owned Rafael Advanced Defense Systems Ltd., Iron Dome uses small radar-guided missiles to destroy in flight Katyusha-style rockets that have ranges of between 5 km (3 miles) and 70 km (45 miles), as well as mortar bombs.

Its development was spurred by Israel's 2006 conflict in Lebanon with Hezbollah and the Gaza Strip war against Hamas in 2008-9 when Israeli towns within range were all but defenseless against the rockets.

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At least 120 rockets have been fired at southern Israel in the latest round of fighting, causing damage but no injuries.

The two Iron Dome batteries, one deployed in Ashkelon and the other in the desert city of Beersheba, some 30 km southeast of the Gaza Strip are meant to shoot down only rockets that will hit designated built-up areas.

The system calculates the trajectory of each projectile and ignores rockets that it predicts will land in open ground.

Ofir Shoham, head of weapons development in the Defense Ministry, said the units had not missed a single rocket within their parameters, preventing significant damage.

Israel is hoping to deploy four more batteries at a cost of $200 million within a year and a half, Shoham told Army Radio.

We want to move forward with that purchase, we hope there will also be some U.S. assistance to make it easier, but we don't want to wait, he said.

Other countries were also looking into buying the Iron Dome, he said. There is interest. There is no other system like it in the world. But we are not yet in a position for mass marketing.

The Obama administration had secured $205 million to help Israel with production and deployment of Iron Dome, but the funding has been held up. Israeli President Shimon Peres, who recently visited the United States, urged the Americans to free up the cash, an aide said.

Israel envisages Iron Dome becoming the lowest level of a multi-tier aerial shield capped by Arrow, a partly US-funded system which shoots down ballistic missiles above the
atmosphere.

But with each interceptor firing estimated to run at between $25,000 and $40,000, pitted against estimated costs of cruder Palestinian rockets as low as $500, there has been criticism the system could bleed the defense budget. Barak dismissed the argument and said Israel would deal with the costs.

(Additional reporting by Dan Williams, editing by Jon Boyle)