A Spanish UN peacekeeper was killed as Israel and Hezbollah exchanged artillery fire - the most serious clashes between the bitter enemies in years - following the attack by the Shiite militant group yesterday.
"Those behind today's attack will pay the full price," Netanyahu's office quoted him as saying at a meeting with Israeli's top security brass yesterday.
The two soldiers were killed when Hezbollah fired an anti-tank missile at a military convoy in an Israeli-occupied border area, the army said.
The UN Security Council called an emergency meeting to discuss ways to defuse tensions between the two sides, who fought a month-long war in 2006.
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Israel responded to the Hezbollah shelling with "combined aerial and ground strikes" on southern Lebanon.
The United States stood by Israel after the exchange of fire and condemned Hezbollah's shelling of an Israeli military convoy, which apparently came in retaliation for a recent Israeli strike on the Golan Heights that killed senior Hezbollah members.
"We support Israel's legitimate right to self-defence and continue to urge all parties to respect the blue line between Israel and Lebanon," State Department spokeswoman Jen Psaki told reporters.
Lebanese security sources told AFP that Israeli forces had hit several villages along the border.
Clouds of smoke could be seen rising from Majidiya village, one of the hardest hit. There was no immediate information on casualties.
A 36-year-old Spanish corporal from the UN peacekeeping force in southern Lebanon was killed in the exchange of fire, officials and Spain said.
"It is clear that this was because of the escalation of the violence and it came from the Israeli side," Spanish Ambassador to the UN Roman Oyarzun told reporters.
"There were several casualties in the enemy's ranks," Hezbollah said.
Israel said mortar fire was also aimed across the border at several military facilities. There were no casualties.
Hardline Foreign Minister Avigdor Lieberman said Israel should respond to the attack "in a very harsh and disproportionate manner, as China or the US would respond to similar incidents".