Hizbollah fighters rained more than 80 rockets on northern Israel in their heaviest bombardment in a decade, hitting Israel's third largest city, Haifa, the Israeli army said.
Israeli ambassador to the United States Daniel Ayalon told reporters in Washington the strike on Haifa was a "major, major escalation" but Hizbollah, a group backed by Iran and Syria, denied it had fired on the port city.
There were no immediate reports of casualties in Haifa, a city of 250,000 people. One woman was killed and 43 people wounded in the other rocket attacks, Israeli medics said.
The violence was the fiercest since 1996 when Israeli troops still occupied part of south Lebanon. It coincided with a major Israeli offensive into the Gaza Strip to try to retrieve a captured soldier and halt Palestinian rocket fire.
US President George W Bush voiced concern about the fate of Lebanon's anti-Syrian government, but offered no direct criticism of the punishment Israel is meting out.
"Israel has the right to defend herself," he said in Germany. "Secondly, whatever Israel does should not weaken the ... government in Lebanon."
US State Department spokesman Sean McCormack later reiterated the US charge that Iran and Syria were to blame for the escalation, calling Hizbollah "subcontractors" in terrorism for the two countries.
Sustained air strikes in south Lebanon killed over 50 civilians and wounded 110 people, security sources said. Ten family members were killed in Dweir village and seven family members died in Baflay. A Lebanese soldier was also killed.
Information Minister Ghazi al-Aridi said after an emergency cabinet meeting that Lebanon wanted an end to "this open-ended aggression" by Israel.
In New York, the UN Security Council set an urgent meeting for Friday at Lebanon's request. Israel and Lebanon will be invited to address the 15-member council.
Israeli aircraft bombed runways at Beirut's international airport, forcing flights to divert to Cyprus.
Later in the day, Israeli aircraft also attacked two military airbases and gunboats fired shells at fuel tanks at Beirut airport, witnesses said. Fires illuminated the night sky as at least one tank blazed.
Planes dropped leaflets in a Beirut suburb, urging residents to stay away from Hizbollah offices, witnesses said.
A senior Israeli officer said the air and sea blockade would be maintained throughout what he said would be a prolonged offensive against Hizbollah fighters in Lebanon.
Israeli naval vessels enforcing the siege turned away three ships carrying fuel to Beirut, a shipping source said. A local shipping agent said seaborne trade was at a standstill at the port, which handles 95 percent of Lebanon's commerce.
Three of Hizbollah's al-Manar television facilities in Beirut and elsewhere came under fire from Israeli helicopters. One person was reported killed and 10 wounded.
Israeli forces also plan to strike the main Beirut-Damascus highway, according to an Israeli Defence Ministry briefing.
Tourists flooded out of Lebanon into neighbouring Syria, now the country's only outlet to the world. Lebanese officials at the Masnaa border post said at least 15,000 foreign-registered vehicles, mostly from the Gulf, had crossed into Syria.
Israel has rejected Hizbollah demands that it release Arab prisoners in exchange for the captive soldiers, named by the Israeli army as Ehud Goldwasser, 31, and Eldad Regev, 26, but says it fears the soldiers could be spirited to Iran.
Iranian Foreign Ministry spokesman Hamid Reza Asefi said Israel was "talking absurdities".
The European Union and Russia criticised Israel's strikes in Lebanon as a dangerous escalation of the Middle East conflict.
Arab foreign ministers agreed to hold an emergency meeting in Cairo on Saturday to discuss Israeli attacks in Lebanon and the Palestinian territories, the Arab League said.
UN Secretary-General Kofi Annan is sending a three-person team to the Middle East to try to defuse the crisis.