Israeli warplanes have launched an air strike on southern Lebanon, a day after Hezbollah militants killed an Israeli soldier in a rocket attack.
The border is a frequent flashpoint
The Israeli army said aircraft bombed two of the group's bases, while witnesses reported several explosions.
On Monday an Israeli soldier died and another was injured when a rocket hit their armoured bulldozer.
A UN official backed Hezbollah claims that the vehicle crossed into Lebanon, a charge Israel had at first denied.
The BBC's David Chazan in Jerusalem says the situation threatens to inflame tension between Israel and Syria, whom Israel says was behind the attack on the soldiers.
The US Secretary of State, Colin Powell, condemned the Hezbollah attack, and warned Syria not to destabilise the region.
Israeli military sources were quoted by Associated Press news agency as saying Hezbollah bases were hit in the Bekaa Valley, close to Lebanon's border with Syria.
There were no immediate reports of casualties.
Israeli Government spokesman Avi Pazner said the raid was "a measured response to a terrorist attack, while we do not want an armed escalation".
United Nations officials in Lebanon said the soldiers were "violating" Lebanese territory after crossing the UN demarcated border when they were attacked.
"Unifil [UN Interim Forces in Lebanon] can confirm that the Israeli
bulldozer was on the Lebanese side when it was hit," said Unifil spokesman Milos Strugar.
Israel initially said the bulldozer was clearing bombs planted by Hezbollah on the Israeli side of the border, although a senior Israeli official later said part of the vehicle crossed the dividing line.
Violence has flared between Hezbollah and Israel intermittently since Israeli troops withdrew from southern Lebanon in May, 2000.
Israel accuses Syria of using Hezbollah - a militant Shia group backed by Syria and Iran - as a proxy army against Israel, a charge Damascus denies.
Mr Pazner said the air raids should be "considered a warning to Hezbollah, which should understand it cannot continue its attacks with impunity, and to Syria, which supports it while talking of peace" - a reference to recent calls by Syria for Israel to resume peace talks.
But Hezbollah dismissed Israel's warning, and said it was weighing its response.
"This escalation will not change the steadfastness of the resistance in defending its people and country," said Hezbollah spokesman Sheikh Hassan Izzeddine.
"It will not change our policies and aims in the slightest."