* Arms deal includes tanks, rocket launchers
* Azerbaijan military build-up worries Armenia
* Still no peace treaty in Nagorno-Karabakh conflict
MOSCOW, June 18 (Reuters) - Russia has begun delivering tanks, artillery cannons and rocket launchers worth $1 billion to Azerbaijan, a Moscow-based defence group said on Tuesday, as the former Soviet republic strengthens its military readiness in the volatile South Caucasus.
Oil- and gas-producing Azerbaijan, where President Ilham Aliyev faces re-election in October, has boosted arms spending and threatened to take back the disputed territory of Nagorno- Karabakh by force from neighbouring Armenia.
Nestled between Iran, arch-rival Armenia and its former Soviet master Russia, Azerbaijan sits on a web of oil and gas pipelines that carry its offshore energy reserves to Europe via Turkey, its ally.
The arms package, signed in a series of contracts between 2011 and 2012, includes nearly 100 T-90C tanks, Smerch and TOS-1A multiple rocket launchers and Msta-A and Vena artillery cannons, said Ruslan Pukhov, director of defence think tank CAST.
A source at the Russian Defence Ministry said the order had been on hold for some time to avoid upsetting the military balance in the South Caucasus, where Russia has a military base in Armenia and an agreement to defend the country if it comes under attack. But the deal had been pushed through at the behest of Russia's powerful arms industry, he said.
A spokesman at Russia's state arms exporter Rosoboronexport was unavailable for comment.
Russia has almost completed deliveries of a previous, larger package, estimated by CAST as worth $2-3 billion and including S-300 missile systems and attack helicopters. Azerbaijan has also announced a $1.6 billion arms deal with Israel.
Although political and defence analysts doubt Azerbaijan has any immediate appetite for war, it has increased its military spending in recent years. Aliyev has said spending on defence will reach $3.7 billion this year.
Armenian President Serzh Sarksyan said last year that Azerbaijan was accumulating a "horrendous quantity" of arms and was threatening Armenia with a new war.
Azerbaijan and ethnic Armenians fought a war in the early 1990s in the mountainous Nagorno-Karabakh enclave which is inside Azerbaijan.
About 30,000 people were killed in the war, which ended in a truce in 1994, although no peace treaty has never been agreed. (Reporting by Thomas Grove; Editing by Mark Trevelyan)