Hezbollah guerrillas have attacked Israeli army positions in a disputed area on the border with south Lebanon.
Border clashes have escalated in recent weeks
About 20 rockets and mortar rounds were fired at three military posts in the Shebaa Farms area, a day after Israel raided deep into Lebanese territory.
Hezbollah's TV station said one soldier was reported killed, but there has been no confirmation of this in Israel.
Israel said its air raid had been to warn Beirut not to allow attacks to be launched against it from Lebanese soil.
Israeli had jets bombed suspected positions of the Palestinian guerrilla group PFLP-GC in Naameh, south of the Lebanese capital Beirut.
After Hezbollah's retaliatory attack on Tuesday, Israeli troops fired back more than 70 shells from Shebaa Farms which hit the outskirts of three Lebanese border villages - Kfar Hamam, Kfar Shuba and Hebbariyeh - starting fires but not causing any casualties.
Four Israeli helicopters hovered over the disputed territory as warplanes flew over the rest of south Lebanon, the French news agency AFP reported, quoting police sources.
Hezbollah says the Shebaa Farms area is occupied Lebanese territory - but Israel, backed by the UN, says the farms are on the Syrian side of the border and so are part of the Golan Heights, which it has occupied since 1967.
Israeli Defence Minister Shaul Mofaz called Monday's bombing in Naameh "an unequivocal message that Israel will not resign itself to violations of its... territory".
Lebanon has complained to the UN Security Council over the raid.
The exchange of fire apparently began on Monday with a rocket attack targeting a naval vessel patrolling Israeli waters. No group has yet claimed responsibility.
The Israeli raid was the closest to Beirut since Israeli troops withdrew from southern Lebanon in 2000.
A spokesman for the PFLP-GC said the rockets hit a PFLP-GC medical centre, causing damage but no casualties.
Israeli said its pilots attacked "a terrorist base used as a platform for terrorist activity in Lebanon".