The exercises took place in open areas in northwestern Iran, said state television, which showed tanks, howitzers and helicopters firing at targets on the ground.
"We respect good neighbourly relations but we do not tolerate the presence of Zionist regime (Israeli) elements and Islamic State terrorists in the region," ground forces commander Brigadier General Kioumars Heydari told state TV.
Azerbaijani President Ilham Aliyev had criticised the Iranian war games in an interview published on Monday.
"Every country can carry out any military drill on its own territory. It's their sovereign right. But why now, and why on our border?" he told Turkish news agency Anadolu.
His comments were rebuffed by Iran's foreign ministry spokesman Saeed Khatibzadeh.
"The drills carried out by our country in the northwest border areas... are a question of sovereignty," Khatibzadeh said in a statement on Tuesday.
Iran and Azerbaijan share a border of around 700 kilometres (430 miles).
A major supplier of arms to Azerbaijan, Israel came under diplomatic fire from Armenia during last year's conflict between the Caucasus neighbours.
Iran and Azerbaijan share a border of around 700 kilometres (430 miles).
Ethnic Azeris make up around 10 million of Iran's 83 million people.
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