Hezbollah fighters launched a raid into Israel and captured two Israeli soldiers yesterday, triggering an Israeli assault with warplanes, gunboats and ground troops in southern Lebanon.
Seven Israeli soldiers and two Lebanese were killed in the violence.
Israeli Prime Minister Ehud Olmert called the soldiers' capture "an act of war," and his Cabinet prepared to approve military action in Lebanon - a second front in the fight against Islamic militants by Israel, which already is waging an operation to free a captured soldier in the Gaza Strip.
Olmert said held the Lebanese government responsible for the two soldiers' safety, vowing that the Israeli response "will be restrained, but very, very, very painful".
The Israeli military planned to call up thousands of reservists.
Resident of Israeli towns on border with Lebanon were ordered to seek cover in underground bomb shelters.
Israeli jets struck deep into southern Lebanon, blasting bridges and Hezbollah positions and killing two civilians, Lebanese security officials said.
Seven Israeli soldiers were killed in the violence, the military said - three in the Hezbollah raid and four when their tank was hit by a landmine as it entered southern Lebanon.
Hezbollah leader Sheik Hassan Nasrallah said Israel's military assault in Lebanon will not win the two soldiers' freedom, saying they will only be released as part of a prisoner swap.
"No military operation will return them," he said. "The prisoners will not be returned except through one way: indirect negotiations and a trade."
Jubilant residents of south Beirut, a stronghold of Hezbollah, and Palestinians in the Ein el-Hilwa refugee camp fired their guns in the air and set off firecrackers for more than an hour after the capture of the Israelis was announced.
Separately, Israel escalated its Gaza assault, dropping a quarter-ton bomb on a home before dawn in an attempt to assassinate top Hamas fugitives. The blast killed nine members of a Palestinian family - seven children and two parents - Palestinian hospital officials said. The head of Hamas' military wing, Mohammed Deif, was wounded but escaped, Israel said.
Yesterday's events threatened to complicated efforts to win the release of Israeli Cpl. Gilad Shalit, who was seized by fighters linked to the Palestinian militant group Hamas in Gaza on June 25.
US Assistant Secretary of State David Welch, on a visit to Cairo, Egypt, said the capture of the two Israeli soldiers was "a very dangerous escalation" that "puts at risk all the effort that's being put forth by many to find a solution to the current situation."
UN Secretary General Kofi Annan called for the immediate release of Israeli soldiers and condemned Israel's immediate retaliation. "We would not want to see an expansion, an escalation of conflict in the region," he said in Rome.
The top UN official in Lebanon, Geir Pedersen, met with Lebanon's prime minister and said Hezbollah had crossed the border, known as the Blue Line, into northern Israel.
"Hezbollah's action escalates the already tense situation along the Blue Line and is an act of very dangerous proportions," he said in a statement.
By the afternoon, seven hours after the Hezbollah raid, Israeli military aircraft were striking large areas of southern Lebanon - targeting bridges, roads and Hezbollah positions in areas as deep as halfway between the Israeli border and the Lebanese capital, Beirut, Lebanese security officials said.
The Hezbollah raid that captured the soldiers came in the morning.
Israel occupied a small strip of southern Lebanon for 18 years before withdrawing in 2000 after high casualties on both sides raised public complaints in Israel.