Hizbollah guerrillas captured two Israeli soldiers and killed eight today, drawing a wave of Israeli air strikes deep into Lebanon that hit a dozen key bridges and killed two civilians.
Israel described the cross-border attack as an act of war by Lebanon that would draw a "very painful" response.
Lebanese Prime Minister Fouad Siniora said his government had not known of the Hizbollah attack and did not endorse it or accept responsibility.
Hizbollah leader Sayyed Hassan Nasrallah said the soldiers had been seized to force Israel to release prisoners.
"What we did today ... is the only feasible path to free detainees from Israeli jails," he told a news conference in Beirut, proposing indirect negotiations, not confrontation.
He said the operation had been in the works for five months. Hizbollah has made two previous failed attempts to catch Israeli soldiers for a prisoner swap in less than a year.
Two Lebanese civilians were killed in an Israeli air raid on a coastal bridge at Qasmiyeh.
Bombs hit nine other bridges and at least 16 Lebanese were wounded, security sources said.
One bridge, at Damour village some 16 km (10 miles) south of Beirut, was hit 12 hours after the first shots were fired.
Several suspected Hizbollah posts in south Lebanon also came under Israeli bombardment from the air and land.
Israeli prime minister Ehud Olmert
Earlier Israeli Prime Minister Ehud Olmert said Hizbollah's attack was an act of war by Lebanon and he pledged a powerful military response.
"It is an act of war by the state of Lebanon against the state of Israel in its sovereign territory," he told a news conference
"We are already responding with great strength ... The cabinet will convene tonight to decide on a further military response by the Israeli Defence Forces," Mr Olmert said, threatening "very painful and far-reaching" action.
Mr Peretz said Israel held the Lebanese government directly responsible for the fate of two Israeli soldiers.
"The Lebanese government, which allows Hizbollah to operate freely against Israel from its sovereign territory, will bear responsibility for the consequences and ramifications (of the cross-border attack)," Mr Peretz said in a statement.
"Israel sees itself as being free to employ any means it deems fit, and the army has been instructed accordingly," he said, seeming to suggest a broad Israeli military response to the abduction.
The White House today condemned the capture and blamed Syria and Iran for the attacks.
"We call for immediate and unconditional release of the two soldiers," said Frederick Jones, spokesman with the White House National Security Council.
"We also hold Syria and Iran, which directly support Hizbollah, responsible for this attack and for the ensuing violence."
Hizbollah leader Sayyed Hassan Nasrallah said the capture of the Israeli soldiers was aimed at forcing the release of prisoners in Israel.
"What we did today... is the only feasible path to free detainees from Israeli jails," Mr Nasrallah told a news conference in Beirut, saying Israeli attacks would not lead to the release of the captured soldiers.
UN Secretary-General Kofi Annan demanded that Hizbollah guerrilla release the Israeli soldiers and urged regional leaders to prevent an escalation of the conflict in the Middle East.
"I condemn without reservation the attack that took place ... and demand that the Israeli troops be released immediately ..." he told a news conference in Rome.
The UN envoy to Lebanon called on Hizbollah to release two soldiers. "Hizbollah's action escalates the already tense situation along the Blue Line (Lebanon-Israel border) and is an act of very dangerous proportions," Geir Pedersen told reporters after meeting Lebanese Prime Minister Fouad Siniora.
"I call on Hizbollah to release the soldiers and urge all parties to exercise maximum restraint and avoid any further escalation."
Lebanese Hizbollah supporters in Beirut celebrate the capture of the soldiers.
Israeli ground forces crossed into Lebanon to search for the captured soldiers, Israeli Army Radio said. It said many troops and aircraft were taking part in searches across the border.
Israel has already launched a military offensive in the Gaza Strip after Palestinian militants captured a soldier on June 25th in a cross-border raid.
"Fulfilling its pledge to liberate the (Arab) prisoners and detainees, the Islamic Resistance ... captured two Israeli soldiers at the border with occupied Palestine," the Syrian- and Iranian-backed Hizbollah said in a statement.
"The two captives were transferred to a safe place," it said, without stating what condition the soldiers were in.
Hizbollah earlier fired dozens of Katyusha rockets and mortar bombs at Israeli border posts and a town, Israeli and Lebanese security sources said.
Israel troops retaliated, shelling the outskirts of four Lebanese border villages and trading fire with guerrillas. Israeli aircraft also bombed three bridges in southern Lebanon. Two Lebanese civilians were killed and a Lebanese soldier was wounded in the raid on the coastal Qasmiyeh bridge, Lebanese security sources said.
Mr Olmert said the cabinet meeting would take place at 7pm (5pm Irish time). He added: "These are difficult days for Israel and its citizens," Mr Olmert told reporters after Hizbollah's announcement.
"There are elements, to the north and the south, that are threatening our stability and trying to test our determination," he said.
"They will fail and pay a heavy price for their actions."
Hizbollah supporters set off fire crackers and distributed sweets in the streets of Beirut after the Islamist group issued its claim. Similar scenes were reported across Lebanon.