A NATO summit this month proposed an alliance missile-shield plan and invited Russia to participate. Questions remain about possible joint command of such a system.
"In the next 10 years, the following alternatives await us - either we reach agreement on missile defense and create a full joint cooperation mechanism, or, if we don't go into a constructive agreement, a new phase of the arms race will begin. And we will have to make a decision on deploying new means of attack," Medvedev told both houses of parliament.
Medvedev has already endorsed the NATO proposal. Experts from both sides are meeting before the end of the year to consider linking NATO's and Russia's separate systems to provide a shield against incoming missiles from rogue nations, and deliver a report to defense ministers in July.
Much of Medvedev's 75-minute address focused on social and economic matters, with only comparatively brief and broad comments on political reforms and fighting corruption.
He exhorted lawmakers to make improving the lives of children Russia's top task and proposed giving free land to families with three or more children. The focus on encouraging larger families reflected serious concern over the demographic plunge that hit post-Soviet Russia.
Because of high mortality rates and a declining birth rate, Russia's population shrank some 7 million people from its 1991 high. However, the country reported a small population increase last year, to 141.8 million.
"The 26 million children and adolescents living in our country should fully develop, grow up healthy and happy and become proper citizens - this is task No. 1 for all of us," Medvedev told legislators in the Grand Kremlin Palace.
Medvedev proposed a variety of measures to improve children's lives. He also suggested that families who give birth to a third child get a supplement of 3,000 rubles ($100) a month and be given free land to build a home.
Opening the address, Medvedev said Russia's budget deficit needs to be lowered if the country is to develop effectively, and said he aims to tame the inflation rate to 4 or 5 percent in the next three years, from the current 7.4 percent.
Russia is running a budget deficit for only the second time in a decade. It stands at 2.1 percent of GDP, though the figure is expected to rise to 4.6 percent because spending typically increases toward the end of the year.
Russia is forging ahead with an ambitious, five-year plan to sell stakes in prized state companies such as oil major Rosneft and banks Sberbank and VTB to raise $60 billion for state coffers. Medvedev said Tuesday those proceeds will be used to fund Russia's modernization drive.
Medvedev also lamented that regional administrations often own assets that are not connected with their functions.
"Authorities must not be the owners of factories, papers and steamships," Medvedev said, quoting a poem by the Russian 20th-century poet Vladimir Mayakovsky.
"Everyone must stick to their own thing," the president added.
The remark seems to be hinting at rich regions such as Moscow, which owns shares in a number of lucrative assets, including a major bank and a refinery.