The Israeli cabinet decided to call up three divisions of reservists, which could mean the deployment of as many as 30,000 more troops.
Israel has however insisted there was no question of another occupation of its northern neighbour, with memories still raw of the quagmire that resulted from its 1982 invasion.
Army chief Dan Halutz said "enormous" damage had been inflicted Hezbollah and that hundreds of fighters had been hit.
Israel insists it will not halt its assault until the two soldiers captured by Hezbollah are freed and the militia is disarmed, but the most powerful army in the Middle East has met with bitter resistance from Shiite militants.
Fierce fighting continued Thursday as Israeli forces tightened their grip the flashpoint border town of Bint Jbeil, Hezbollah's main military base near the border.
The army has warned thousands of inhabitants of the border area to leave.
Latest attacks
A Nigerian domestic worker and a Lebanese police officer were among at least 11 people, killed in Lebanon on Thursday in a new wave of Israeli attacks.
The fresh strikes brought the death toll in Lebanon from Israel's offensive to 420 people, including 349 civilians, since the bombardment started 16 days ago.
According to police, the Nigerian domestic worker was killed when an Israeli missile hit his motorbike while he was riding between the port city of Tyre and the neighbouring village of Jouwaya.
A woman was killed when an Israeli missile was fired on the southern port of Tyre. Another woman was killed when her home was destroyed by an Israeli air raid in the village of Rub Talatheen, close to the border.
A civilian was killed and another wounded when a van carrying a load of vegtables was destroyed in an air raid around Barr Elias in the east of Lebanon.
Close to nightfall, a civilian was killed in an air raid on his car in the Rayak region in the east of Lebanon.
Police also said that five other civilians, including a Palestinian, and a Lebanese gendarme were also killed in early morning raids.
According to rescue workers the death toll should rise even further as dozens more civilians, including a large number of children, are still buried underneath the rubble of houses destroyed in Israeli air strikes around Tyre.
No let up in militant attacks
Dozens of rockets fired by Hezbollah guerrillas in Lebanon continued to hit towns across northern Israel on Thursday.
Emergency services have said that at least one person was wounded in the attacks, as rockets landed in Safed, Rosh Pina and the border town of Shlomi.
Hezbollah has fired more than 1,400 rockets into northern Israel since the conflict erupted, killing at least 18 Israeli civilians and wounding over a thousand.
Hezbollah leader Sayyed Hassan Nasrallah has vowed to take the war deeper into Israel, suggesting there could be strikes south of the city of Haifa.
Israel's offensive against Hezbollah has killed at least 433 people in Lebanon, mostly civilians.
A total of 51 Israelis have died.
Israel launched its latest campaign on Hezbollah following a cross-border raid by the Shi'ite militia on July 12 which saw two of its soldiers captured.
Hezbollah casualties
Hezbollah announced that four of its fighters had been killed, without specifying the date or the location of the fatalities.
Hezbollah has announced the death of 32 of its fighters, including two rescue workers, while its Shiite ally Amal reported the death of six of its militants since the offensive began.
More deaths in Gaza
Hospital officials said a Palestinian teenager and a militant were killed in eastern Gaza as Israeli troops withdrew from the east of the coastal strip.
Anass Zomnutt, 13, died of bullet wounds at the Jabaliya refugee camp northeast of Gaza City, as the Israeli troops were withdrawing.
A body of a Hamas militant was found in the camp after the troops withdrew.
Israeli aircraft also attacked homes owned by Palestinian militants and a metal workshop in the Gaza Strip, wounding seven people.
The Israeli army said it had carried out several air strikes on buildings used to make and store weapons. Some had belonged to gunmen from the governing Hamas Islamist movement, it said.
Dozens of Israeli tanks and armoured vehicles withdrew from areas east and north of Gaza City after a two-day operation against gunmen that killed 30 Palestinians, around half of them civilians, witnesses and Palestinian security sources said.
The army confirmed the pullback, saying the operation had finished.
Earlier, according to Palestinian security officials, Israeli troops killed five Palestinians, including a 75-year-old woman and a 12-year-old-boy.
A Palestinian was also shot and killed in Jerusalem after he attacked a police patrol, and the severely burnt body of a man, thought to be Israeli, was found in the West Bank.
At least 150 Palestinians, around half of them gunmen, have been killed in the assault on Gaza.
Israel's army and air force have been attacking the Gaza Strip, after after Hamas linked militants killed two soldiers and captured a third in a cross-border raid on an Israeli outpost on June 25.
In light of that raid, Israel planned to raze homes and other structures just inside Gaza's border to stop militants from using them as cover to build tunnels for attacks and weapon smuggling, the YNet news Web site reported.
It quoted an unnamed senior officer in the army's southern command as saying the aim was to "clean" a one-kilometre wide strip of land.
It was unclear if this meant southern Gaza, where most tunnels have been found, or the entire coastal strip.
Spokeswomen for the army and the Defence Ministry said they had not heard of the plan.
Palestinian leader Mahmoud Abbas said the situation in the Palestinian areas and Lebanon was only likely to get worse after world leaders failed to agree on an immediate ceasefire at a summit in Rome on Wednesday.