Hezbollah fighters have launched more than 230 rockets from Lebanon, the biggest single-day barrage since the conflict began, Israeli officials say.
One person was killed and dozens injured as some rockets landed up to 70km inside Israel, the deepest so far.
The upsurge came as Israeli Prime Minister Ehud Olmert said Israel had destroyed Hezbollah's infrastructure.
Israel renewed air strikes on the southern Beirut suburb of Dahieh, a Shia Muslim area, early on Thursday.
At least three explosions were reported in an area extensively bombed earlier in Israel's campaign, in the first air strikes on the Lebanese capital for several days.
The Israeli prime minister has insisted there would be no ceasefire until an international force was deployed in southern Lebanon.
"I said I'd be ready to enter a ceasefire when the international forces, not will be ready, but will be deployed," Mr Olmert said of the timetable for a halt to the violence.
The hail of Hezbollah rockets came after Israeli troops raided Baalbek, a Hezbollah stronghold in north-east Lebanon, seizing five people they said were Hezbollah fighters. Hezbollah said they were civilians.
An Israeli soldier was killed in heavy fighting with Hezbollah in southern Lebanon.
Four other Israeli soldiers were injured, when an anti-tank missile struck the house in which they were sheltering in the village of Aita al-Shaab.
One Hezbollah rocket killed a man near the Israeli town of Nahariya on the west coast, bringing the number of Israeli civilians killed since the conflict started to 19.
About three dozen more Israeli soldiers have also died.
In Lebanon, about 750 people - mainly civilians - have been killed by Israeli action, according to the Lebanese health minister. This figure includes unrecovered bodies.
Clashes have been continuing in southern Lebanon between Hezbollah and a force of Israeli troops now said to number around 12,000.
The Israeli campaign began three weeks ago after Hezbollah militants captured two Israeli soldiers.
In other developments:
- Britain's UN ambassador said agreement on an initial Security Council resolution to end the violence was close
- World Food Programme officials said Israel had assured them emergency fuel supplies would be given safe passage into Lebanon
- Iran's supreme leader urged the Muslim world to stand up to Israel and the US over their role in the conflict in Lebanon
The BBC's Richard Miron says that, before Wednesday's upsurge in Hezbollah rocket attacks, some northern Israeli residents had begun returning home, believing that the Israeli army had dealt with the threat.
Israeli planes also struck a village near Baalbek, killing several people
Hezbollah militants have claimed they used a new type of rocket for the attack - a Khaibar-1, thought by the Israelis to be a modified Iranian Fajr-5, which has a longer range than the Katyusha rockets they usually fire into Israel.
One rocket fired on Wednesday landed near Jenin in the West Bank - believed to be the furthest any of the militants' rockets had reached since the conflict began.
A Hezbollah spokesman, Ghalib Abu Zeinab, said in an interview with the BBC Arabic Service that the latest attacks showed that Hezbollah was unbroken.
"The rockets that have been raining down since this morning... and the firing of a missile over a distance of 70km, all this proves that the Lebanese resistance still has a high capability, including a missile capability," he said.
Israeli Interior Minister Avi Dichter told the BBC that although Hezbollah remained active, he was confident Israel would achieve its aims in Lebanon.
"Hezbollah is still alive, but the mission of this operation is not to crack down Hezbollah totally," he said.
"We're trying to minimise the number of rockets launched towards Israel, and we know that all other targets that we have put right at the beginning of this special operation are going to be fulfilled."