Prime Minister Benjamin Netanyahu has warned Lebanon's Hezbollah it will pay the "full price" after missiles killed two Israeli soldiers in an attack that raised fears of another all-out war.
A Spanish UN peacekeeper was also killed as Israel and Hezbollah exchanged artillery fire - the most serious clashes between the bitter enemies in years - following the attack by the Shi'ite militant group.
"Those behind today's attack will pay the full price," Netanyahu's office quoted him as saying at a meeting with Israeli's top security brass on Wednesday evening.
The two soldiers were killed when Hezbollah fired an anti-tank missile at a military convoy in an Israeli-occupied border area, the army said.
Seven other soldiers were wounded, but none was reported to have suffered life-threatening injuries.
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The UN Security Council called an emergency meeting to discuss ways to defuse tensions between the two sides, who fought a month-long war in 2006.
Israel responded to the Hezbollah shelling with "combined aerial and ground strikes" on southern Lebanon - an apparent retaliation for a recent Israeli strike on the Golan Heights that killed senior Hezbollah members.
The US stood by Israel after the exchange of fire and condemned Hezbollah's shelling of an Israeli military convoy.
"We support Israel's legitimate right to self-defence and continue to urge all parties to respect the blue line between Israel and Lebanon," State Department spokeswoman Jen Psaki told reporters.
EU foreign affairs chief Federica Mogherini appealed for an "immediate cessation of hostilities".
Lebanese security sources told AFP that Israeli forces had hit several villages along the border.
A 36-year-old Spanish corporal from the UN peacekeeping force in southern Lebanon was killed in the exchange of fire, officials said.
It said the precise cause of the peacekeeper's death was "as yet undetermined" and urged all sides to show "maximum restraint to prevent an escalation".
