Israeli jets struck deep into southern Lebanon, blasting bridges and Hezbollah positions and killing two civilians, Lebanese security officials said.
The Israeli military planned to call up thousands of reservists, and residents of Israeli towns on the border with Lebanon were ordered to seek cover in underground bomb shelters.
Israel's Defense Ministry said the Lebanese government was responsible for the two soldiers' safety.
At least six Israeli soldiers were killed in the Hezbollah attack and Israeli response, the Lebanese officials said. The Israeli army confirmed casualties among its troops.
The United States, U.N., European Union, France and Germany expressed deep concern about the fighting. U.N. Secretary-General Kofi Annan called for the immediate release of kidnapped Israeli soldiers and condemned Israel's retaliation in southern Lebanon.
Israel dropped a quarter-ton bomb on a home in the Gaza Strip before dawn to try to assassinate top Hamas fugitives, escalating its two-week offensive in the Gaza Strip aimed at freeing a soldier seized by fighters linked to the Palestinian militant group Hamas.
The blast killed nine members of a Palestinian family - including a 4-year-old boy. The head of Hamas' military wing was wounded but escaped, Israel said.
The Arab League planned an urgent meeting on the crisis Thursday amid "fears of widening of tension and possible Israeli strike against Syria," which backs Hezbollah, a senior league official in Cairo said, speaking on condition of anonymity because of the sensitivity of the issue.
Syrian Vice President Farouk al-Sharaa blamed Israel for the escalating violence in Lebanon and the Palestinian territories and denied his country had a role in either abduction.
"It's up to the resistance - both the Lebanese and the Palestinian - to decide what they are doing and why are they fighting," he told reporters in Damascus.
The top U.N. official in Lebanon, Geir Pedersen, met with Lebanon's prime minister and denounced Hezbollah's incursion across the border into northern Israel, known as the Blue Line.
"Hezbollah's action escalates the already tense situation along the Blue Line and is an act of very dangerous proportions," he said in a statement.
U.S. Assistant Secretary of State David Welch, on a visit to Cairo, Egypt, said the soldiers' capture was "a very dangerous escalation."
He accused Syria of interfering to prevent a solution to abduction of Israeli Cpl. Gilad Shalit, who was seized by Gaza militants.
"We are dismayed that so far there are some who are intending to interfere," he said.
Jubilant residents of south Beirut, a stronghold of Hezbollah, and Palestinians in the Ein el-Hilwa refugee camp fired in the air and set off firecrackers for more than an hour after the capture of the Israeli soldiers was announced.
Lebanese officials, speaking on condition of anonymity because they were not authorized to talk to the media, said three Israeli soldiers were killed in Hezbollah's initial raid and another three died in a tank hit by Hezbollah fighters as it crossed the border.
Israeli security officials said their troops had crossed into a southwestern sector of Lebanon, near where the soldiers were seized,to keep their captors from moving them deeper into Lebanon.
Israeli warplanes made their deepest foray into Lebanon in an afternoon strike on a road in the Zahrani region along the Mediterranean coast - about halfway between the border and the Lebanese capital, Beirut. Anti-aircraft guns opened fire on jets flying over the coastal city of Sidon.
Army Chief of Staff Lt. Gen. Dan Halutz warned the Lebanese government that the Israeli military will target infrastructure and "turn back the clock in Lebanon by 20 years," if the soldiers are not returned, Israeli TV reported.
Israel invaded Lebanon in 1982 and withdrew after high casualties on both sides.
Israeli jets Wednesday struck two bridges over the Litani River deep in southern Lebanon, killing two civilians on the main north-south highway between the port cities of Tyre and Sidon, Lebanese security officials said.
Gunboats off the Lebanese coast joined in the assault on Hezbollah positions.
A top Hamas leader said his movement did not coordinate with Hezbollah on the capture of the soldiers, but said it was "natural" for the two groups to work together in their demands against Israel.
"Now Israeli has to decide on its choices," Osama Hamdan, Hamas' spokesman in Lebanon, told The Associated Press. "It is early to talk about details of the exchange, but no doubt the operation carried out by Hezbollah today will strengthen our demands to exchange the captives."
Hamas-linked militants have demanded the release of at least some of the estimated 9,000 prisoners held by Israel in exchange for Shalit's freedom. Hamdan's comments suggested the group now may toughen its stance.
Shalit, 19, was captured June 25 by Hamas-linked militants on a cross-border raid into Israel from Gaza.
The military arm of Hezbollah said its fighters captured two Israeli soldiers "on the border with occupied Palestine, fulfilling the promise to liberate its prisoners" held by Israel.
In a statement faxed to the AP, the group said "the prisoners have been moved to a safe area."
The Israeli offensive in Gaza since Shalit's capture has killed more 60 Palestinians, most gunmen but about a dozen civilians. One Israeli soldier has died in that operation, shot by fellow troops.
Israel occupied a small strip of southern Lebanon for 18 years before withdrawing in 2000 amid public complaints in Israel. Hezbollah fighters have controlled the Lebanese side of the border with Israel since then. Israel and Hezbollah have been clashing for two decades and still fight over a small sliver of border territory, Chebaa Farms. U.N. cartographers say it belongs to a part of Syria that Israel annexed, but Lebanon claims the territory and Hezbollah has vowed to liberate it.
Hezbollah has repeatedly expressed its intent to kidnap Israeli soldiers to trade for Arab prisoners.
Lebanon is under U.N. and U.S. pressure to disarm the Shiite guerrilla group and move its own military into the south, but the government has refused to do so, calling Hezbollah a legitimate resistance group.
Israel has carried out several prisoner swaps with Hezbollah to obtain freedom for captured Israelis. An Israeli civilian and the bodies of three Israeli soldiers were exchanged for 436 Arab prisoners and the bodies of 59 Lebanese fighters in January 2004. In 1985, three Israeli soldiers captured in Lebanon in 1982 were traded for 1,150 Lebanese and Palestinian prisoners.
