Heavy fighting erupted between Israeli forces and Hezbollah fighters on the border with Lebanon, leaving two Israeli soldiers and one UN peacekeeper dead.
Missiles were launched at Israeli targets in the Shebaa Farm area in the Golan Heights, which is occupied by Israel and claimed by Lebanon as their territory. The Israeli army responded by launching artillery fire and air strikes into southern Lebanon.
Hezbollah said the attacks were in response to an Israeli air strike last week which killed several of its fighters.
The UN special co-ordinator for Lebanon, Sigrid Kaag, expressed "deep concern over the serious deterioration of the security situation" and "urgently called on all parties to refrain from any actions that could destabilise the situation further", urging "maximum restraint to prevent an escalation".
Israeli Prime Minister Benjamin Netanyahu held an emergency security meeting and said the attackers would "pay the full price".
The UN Interim Force in Lebanon announced that one of its peacekeepers had been killed in the area.