Israel launched air strikes and sent troops and tanks into southern Lebanon Wednesday, after Hezbollah television said its guerrillas had abducted two Israeli soldiers along the border.
Israeli Prime Minister Ehud Olmert described the Hezbollah attacks as an "act of war" by Lebanon and promised a "very painful and far-reaching" response, The Associated Press reported.
Hezbollah is demanding a prisoner exchange for the soldiers' release. In a later claim on its television network, Hezbollah said it had "destroyed" an Israeli tank crossing into southern Lebanon. The fate of the tank crew was not known.
The valleys along the Israeli-Lebanese border thundered with artillery fire and clouds of blue-gray smoke could be seen rising above Lebanese positions.
Israeli military sources confirmed a troop build-up on the northern border and said preparations were being made for possible call up of reserve soldiers.
"This morning there was an attack on civilians and soldiers in the north. At this moment there are Israeli security forces operating inside Lebanon," Olmert told reporters.
"The government will convene this evening for a special cabinet meeting. I want to make clear that the events this morning are not a terror attack but an operation of a sovereign state without any reason or provocation."
The Israeli Cabinet is scheduled to meet at 7 p.m. (noon ET), according to Olmert's office.
"The Lebanese government, of which Hezbollah is part of, is trying to undermine the stability of the region, and the Lebanese government will be responsible for the consequences," Olmert said.
The abduction of the soldiers would open a second front after Israel sent tanks and troops into the Palestinian territory of Gaza following the abduction of an Israeli soldier by Palestinian militants. Israeli Cpl. Gilad Shalit, 19, was abducted in a raid on an Israeli military post in southern Israel on June 25.
The militants holding him have demanded the release of Palestinian prisoners held by Israel in exchange for Shalit. Israel has flatly refused.
Responding to the most recent incident along the Israel-Lebanon border, Israeli Defense Minister Amir Peretz said in a statement: "The State of Israel sees itself free to use all measures that it finds it needs and the (Israeli Forces) have been given orders in that direction.
"If the soldiers are not returned we will turn Lebanon's clock back 20 years," Israel Defense Forces Chief of Staff Dan Halutz to Israeli Channel 10.
Israeli forces, observers said, were bombing roads, bridges and guerrilla positions in southern Lebanon an attempt to prevent guerrillas from moving the troops deeper into Lebanon.
Israeli forces are also responding to rocket attacks fired by Hezbollah into northern Israel, according to the army.
Four Israeli civilians and six soldiers have been wounded in the fighting so far, according to the Israeli military.
The IDF instructed citizens in northern villages to take shelter as the violence escalated.
It is the latest skirmish between Israel and Hezbollah in Lebanon, whose forces traded cross-border fire in late May following the assassination of an Islamic Jihad official in the southern Lebanese city of Sidon.
Mahmoud Majzoub, also known as Abu Hamza, was killed in a car bombing, which Islamic Jihad blamed on Israel. Israel denied any involvement in the incident.
Hezbollah is designated a terrorist group by the United States and Israel but is a significant player in Lebanon's fractious politics.
Israel set up a security buffer zone in southern Lebanon from 1978 until 2000.