A fighter with the Lebanese Hezbollah militia and a member of a Syrian-backed radical Palestinian group were killed in the Israeli raids. The attacks from Lebanon left two Israeli soldiers wounded.
Each side blamed the other for the tit-for-tat attacks on the border, which remains highly volatile six years after Israel ended its 22-year occupation of southern Lebanon in May 2000.
Between six to eight rockets were fired from Lebanon during the day, the Israeli military said, and Hezbollah also claimed to have bombed the Israeli army's border headquarters although no damage was reported.
Israel warplanes swung into action, launching eight raids against bases of the pro-Syrian PLFP-GC and Hezbollah holdouts in southern and eastern Lebanon near the border with Syria.
One raid targeted a base just 10 kilometres south of Beirut, triggering panic among motorists on a busy nearby highway, police said.
PFLP-GC leader Ahmad Jibril, in an interview published in the Lebanese daily Al-Balad on Sunday, said his group was coordinating its anti-Israeli military action with Hezbollah.
Israeli foreign ministry spokesman Mark Regev said his country would make a formal complaint to the UN Security Council over the rocket firing.
Israelis ordered to shelters
UN peacekeepers have since brokered a ceasefire and calm appears to have returned to the volatile area.
Residents of the northern Israeli towns of Kiryat Shmona and Nahariya were ordered into shelters for several hours amid the fierce shelling but were later given the all-clear.
A statement from the radical Palestinian group Islamic Jihad said it had fired the rockets to avenge the death of one of its leaders in a car bomb attack in Lebanon on Friday that it blamed on Israel. But a Jihad spokesman in Lebanon later said the statement was "false".
Israeli Prime Minister Ehud Olmert vowed to deliver a "painful blow" to those behind the rocket attacks which hit deeper into Israeli territory than ever before, near the town of Safed.
One soldier was lightly wounded in the initial rocket attack near Safed, which lies between the border and the Sea of Galilee, while another was in a moderate condition after being wounded by a Hezbollah sniper.
Hezbollah said one of its fighters lost his life in an Israeli air raid while a militant from the Popular Front for the Liberation of Palestine-General Command (PFLP-GC) was also killed and five wounded.
Israel and Lebanon denounce attacks
"If they continue, they will live to regret it," Mr Olmert said of the rocket attacks, adding that Israel was prepared to use "all means at its disposal."
"Israel did not initiate attacks in Lebanon," he added. "There should be no mistake. We will not tolerate it and will reach out for those who initiated it."
But Lebanese Prime Minister Fuad Siniora denounced what he called the "enemy's aggression". He called on the international community to force Israel to withdraw from the disputed Shebaa Farms area, blaming the worsening situation on the frontier on "continuing Israeli occupation".
Tensions remain high on the border despite Israel's withdrawal, with violence often flaring between Hezbollah fighters and Israeli soldiers in the disputed Shebaa Farms region.
Shebaa was seized from Syria by Israel in the 1967 Arab Israeli war but is now claimed by Lebanon with Damascus's consent.
Before Sunday, the last rocket attack was in December, when seven Katyushas slammed into towns in northern Israel, without causing damage.