Israel has become one of the world's leading arms exporters with deals worth $12.9 billion from 2004-11, mostly with developing countries, the United States' Congressional Research Service says.

That put Israel, which has the most advanced defense industry in the Middle East, in eighth place among major arms suppliers, behind the United States, Russia, France, Britain, Germany, China and Italy.

The CRS report said actual Israeli arms transfers total $10.6 billion in 2004-11 but that's because deliveries are often made some time after contracts are signed.

Defense exports are reported to be the backbone of Israel's high-tech economy. There are some 150 companies in the defense sector with combined revenues estimated at more than $3.5 billion a year.

The main companies are state-owned Israel Aerospace Industries and Rafael Advanced Defense Systems.

Along with private firms they produce a wide range of conventional systems, ranging from ballistic missiles and anti-missile weapons, main battle tanks, radar and communications systems and warships.

Despite continued growth, the defense sector is grappling with fallout from the global economic malaise, which includes stringent cuts in defense spending in Israel as well as its customers, and flawed government policies over the last decade.

In 2010, Israel's defense industry sales totaled $9.6 billion, but Oxford Analytica observes that its defense companies "are now facing a problem similar to the one they faced in the late 1970s and early 1980s, when they reacted quickly to the lessons learned during the 1973 war and the spate of airline hijackings.

"Systems invented at that time included unmanned aerial vehicles and sophisticated airport security networks but for a while it was hard to sell these products.

"Both systems have since been adopted by the security forces of many countries and form the core of Israeli defense exports," Oxford Analytica noted.

These days, the defense industry's trying to implement lessons learned from the wars in Afghanistan and Iraq, Israel's 34-day war with Lebanon's Hezbollah in 2006 in which Israel's vaunted military was fought to a standstill by a largely guerrilla force, and the unprecedented missile bombardment of northern Israel by the Iranian-backed movement.

However, Oxford Analytica notes, "related products are arriving on the market when the wars in Iraq and Afghanistan are winding down and defense budgets in most countries are being cut.

"Foreign buyer interest in these systems has thus been minimal."

The United States, Israel's strategic ally and benefactor, provides Israel with $3.1 billion a year in military aid, although much of that's spent on U.S. weapons such as Lockheed Martin's F-35 Joint Strike Fighter and other military hardware.

But the Americans also heavily fund Israeli defense projects.

In July, Congress approved an aid package of nearly $1 billion -- on top of the annual aid -- for developing IAI's Arrow-3 ballistic missile interceptor with Boeing, as well as lower-level systems like Iron Dome and David's Sling being developed by Rafael.

These systems and their associated radars, which will eventually be part of a multitiered Israeli missile defense shield, are likely to become crucial exports for the Jewish state's defense sector export.

It's not clear whether the Americans will buy any of the systems but South Korea, India and other important buyers of Israeli defense products have expressed interest.

Among the major contracts Israeli companies have signed in 2012 is a $1.6 billion deal between IAI and oil-rich Azerbaijan, a key Israeli defense customer, in January for aircraft, missiles, unmanned aerial vehicles and intelligence systems.

Israel has become a strategic ally of the former Soviet Asian republic that's the northern neighbor of Iran in the last few years.

This has heightened speculation that Israel uses Azerbaijan for intelligence surveillance of the Islamic Republic, whose nuclear program the Jewish state deems an existential threat.

In July, IAI signed two deals worth nearly $1 billion with Italy.

One involves building a $182 million high-resolution optical military satellite system, known as OPTSAT-3000, for Telespazio, prime contractor for a $200 million satellite, launch services and logistics services and in-orbit testing.

IAI will also supply two Gulfstream G-550 executive jets converted to early warning aircraft equipped with NATO-standard communications, tactical links and other subsystems developed by its Elta Systems division, each worth $750 million.