Four UN observers were killed in the Israeli bombardment on their position in the south Lebanon border town of Khiam.
A Lebanese security source said the peackeepers inside the post at the time of the strike comprised an Austrian, a Canadian, a Chinese national and a Finn.
Later, China said it had summoned Israel's ambassador in Beijing and demanded an apology over an Israeli air strike in Lebanon that killed a Chinese United Nations worker.
Foreign ministry spokesman Liu Jianchao said Chinese assistant foreign minister Zhai Jun had called in Israeli ambassador Yehoyada Haim for an "emergency" meeting over Tuesday's incident.
"The Chinese side... demands that the Israeli side open a comprehensive investigation, apologise to the Chinese side and the victim's family and help the Chinese side in carrying out the mourning activities," ambassador Haim was told, according to the foreign ministry spokesman.
Earlier in a statement, the Chinese foreign ministry spokesman said: "The Chinese side is deeply shocked and strongly condemns this. The Chinese side demands that all sides in the confrontation, especially Israel, take all measures to ensure the safety of UN peacekeepers."
Describing the air strike, Milos Strugar, spokesman of the UN Interim Forces in Lebanon (UNIFIL) said "an air bombardment hit directly a building of UN observers, which is a house and a shelter, in Khiam".
The UNIFIL spokesman said the Israeli bombardment continued even after the peacekeeping force dispatched a rescue team to search the rubble.
A Lebanese security source said three bodies had so far been recovered from the remains of the post in Khiam, while intense efforts were underway to recover the final body from beneath the rubble.
Fifty of the victims' former comrades from the Indian contingent of UNIFIL were desperately bidding to extract the remaining corpse with their hands or using improvised shovels.
Attempts to bring in a bulldozer were in vain but the Lebanese security source said that Israel had agreed to cease its bombardment to allow the recovery operation to continue.
Annan shocked
UN Secretary General Kofi Annan said he was "shocked" at Israel's "apparently deliberate targeting" of a UN post in Lebanon.
He said Israel appeared to have struck the site deliberately and called for an immediate investigation.
Israel's UN Ambassador Dan Gillerman expressed his "deep regret" for the deaths and denied Israel hit the post intentionally.
"I am shocked and deeply distressed by the hasty statement of the secretary general, insinuating that Israel has deliberately targeted the UN post," he said, calling the assertions "premature and erroneous".
France, whose officers command the 28-year-old UN Interim Forces in Lebanon force, also protested.
French ambassador Jean-Marc de La Sabliere, president of the UN Security Council for July, said: "We condemn this bombing on a UNIFIL position."
Prime Minister John Howard says he understands several Australian soldiers attached to the UN force survived the attack, but it’s unknown if they were injured.
A defence spokesman in Canberra says no Australian Defence Force members were operating at the base at the time of the bombing and none were injured.
The ADF has a dozen soldiers attached to the 400-member UN Truce Supervision Organisation which monitors the borders of Israel, Lebanon, Syria, Egypt and Jordan under a 1948 UN mandate.
Ambassadors from the permanent members of the UN Security Council were told about the dead from the reported Israeli attack during a meeting to discuss Iran.
"It is something we take seriously," the US ambassador to the UN John Bolton said. "We are going to focus on this incident, see what we can find out about it."
Troops fight Hezbollah guerrillas
Israeli troops on the ground continued to battle Hezbollah guerrillas after Israel effectively ruled out any chance of a rapid ceasefire to end the two-week-old Lebanon conflict.
In the latest attacks, the Arabic news channel Al-Jazeera reported one Israeli soldier had been killed and five wounded in fierce fighting in the south Lebanon border town of Bint Jbeil.
Israeli public radio spoke of "six casualties" in Israeli ranks in clashes in the town. It did not elaborate.
"There are still exchanges of fire in Bint Jbeil ... They're putting up resistance and the fighting is continuing," an Israeli military spokesman told AFP.
Earlier today, Hezbollah leader Hassan Nasrallah insisted in a television broadcast that the town was not in Israeli hands.
"They do not control Bint Jbeil. All the city of Bint Jbeil is still in the hands of the resistance," he said.
In other incidents:
- An entire family of seven was killed when an Israeli missile slammed into their home in southern Lebanon while troops moved into a key border town where Hezbollah has a military headquarters.
- The Israeli army said it had killed a senior Hezbollah commander, Abu Jaafar, in fighting in southern Lebanon
- Israeli forces have taken the town of Bint Jbeil after fierce fighting and are moving on the village of Yaroun to the south.
- Israel resumed air raids on Beirut, with explosions heard in southern suburbs.
- Hezbollah has fired more Katyusha rockets into Israel, killing a 15-year-old Arab-Israeli girl in the northern Israeli village of Maghar
- The northern Israeli city of Haifa was also bombarded with a large salvo of Hezbollah rockets.
- Hezbollah said 27 of its fighters had been killed so far, but the Israeli military said it had killed "some dozens".
- Two soldiers were also killed in fighting Monday, bringing to 42 the toll of Israelis killed - 24 servicemen and 18 civilians.
- Israel has also continued its aggressive offensive on the Gaza Strip, where 116 people have been killed during the four week operation to free a captured soldier and halt rocket attacks.
Israel is struggling to knock out Hezbollah despite its vastly superior military might.
Israel has massed troops on the border and warned residents of southern Lebanon to flee but says it has no plans for an all-out invasion for now.
The offensive has left Lebanon virtually cut off from the world, made hundreds of thousands of people refugees in their own country and destroyed billions of dollars of infrastructure.
Lebanon’s Prime Minister, Fouad Siniora, who has issued several desperate appeals for a ceasefire, accused Israel of trying to set his country back 50 years in his meeting with Ms Rice.
Hezbollah miscalculated response
Hezbollah chief Hassan Nasrallah remained defiant, vowing that deeper incursions would not stop the rocket fire, and ruling out any efforts for a negotiated settlement unless it involved a prisoner swap.
But a senior Hezbollah official says that the guerrilla group had not expected Israel to react so strongly to its capture of two Israeli soldiers last month.
Mahmoud Komati, the deputy chief of Hezbollah’s political bureau, also said that his group would not lay down arms.
"The truth is - let me say this clearly - we didn't even expect (this) response.... that (Israel) would exploit this operation for this big war against us," Komati said.
Hezbollah, he said, had expected "the usual, limited response" from
Israel.
In the past Israeli responses to Hezbollah actions included sending in commandos into Lebanon and kidnapping Hezbollah officials or briefly targeting specific Hezbollah strongholds in southern Lebanon, he said.
Evacuation effort
UN humanitarian coordinator Jan Egeland has issued an urgent appeal for US$150 million for 800,000 people made homeless by Israel's onslaught and criticised both Israel and Hezbollah for attacking civilians.
Israel said it would allow aid shipments to land in at Beirut airport, which had been repeatedly pounded by Israeli air strikes since the offensive began.
Foreign governments are continuing to send flotillas of ships to evacuate stranded nationals, mainly to the nearby resort island of Cyprus, but the operation is winding down.
The tiny Mediterranean island has been battling to find temporary accommodation and flights for the estimated 70,000 evacuees at peak summer holiday season.
Australia’s evacuation program has ended but some Australian families say many of their relatives are still stranded in Lebanon.
Australian Foreign Minister Alexander Downer says the government evacuation of its citizens will end today and it will then be up to people to arrange their own transport out of Lebanon.
Meanwhile Israeli gunboats fired warning shots at a Turkish ferry helping to evacuate Australians from Lebanon and held it for several hours.
No evacuees were on board the high-speed ferry Akcakoca when the incident occurred and neither the vessel nor crew were hit.