Ground forces commander Major-General Benny Gantz said Israeli soldiers took the hilltop village of Maroun al-Ras, where six Israeli commandos have been killed this week, inflicting dozens of casualties on Hizbollah.
Israel said it planned no full-scale invasion of Lebanon for now, but warned villagers near the border to leave. In the town of Marjayoun, about five miles from the border, cars packed with people waving white flags fled north fearing Israel will step up an 11-day-old war which has killed 351 people, mostly civilians.
There was no immediate comment from Hizbollah, which had said in an earlier statement its fighters had inflicted casualties on the Israeli side. An Israeli army spokesman had said troops backed by around a dozen tanks and armoured vehicles had been fighting in Maroun al-Ras, about two km inside Lebanese territory, and found Hizbollah bunkers and weapons stores.
He said Israel might widen its military action, but was still looking at "limited operations". "We're not talking about massive forces going inside at this point."
Resisting growing calls for a cease-fire, the United States stressed the need to tackle what it sees as the root cause of the conflict - Hizbollah's armed presence on Israel's border and the role of its allies, Syria and Iran.
"Resolving the crisis demands confronting the terrorist group that launched the attacks and the nations that support it," US President George W. Bush said on Saturday, a day before Secretary of State Condoleezza Rice was to head to Israel.
Israeli forces had urged residents of 14 villages in south Lebanon to leave by 4 pm (1300 GMT) ahead of more air raids. Israel has built up its forces at the border and called up 3,000 reserves. Defence minister Amir Peretz has spoken of a possible land offensive to halt rocket attacks that have killed 15 Israeli civilians in the past 11 days.
But Israel is wary of mounting another invasion, only six years after it ended a costly 22-year occupation of the south. Already, 19 soldiers have been killed in the latest conflict.
Israeli air raids hit transmission stations used by several Lebanese television channels and a mobile telephone mast north of Beirut, cutting mobile phone services in northern Lebanon.
The official in charge of the station transmitting LBC programmes was killed, the channel said. A nun at a nearby church said two French nationals were also lightly wounded.
Israel's army said it hit a Hizbollah radio and TV transmitter and an antenna for frequencies "used by Hizbollah". Hizbollah's al-Manar television was still broadcasting after the strikes. Israeli medics and the army said at least 10 Hizbollah rockets hit towns in northern Israel, wounding 10 people.
Across south Lebanon, families piled into cars and trucks - flying white sheets they hoped would ward off attack - and clogged roads north after Israel warned residents to flee for safety beyond the Litani river, about 12 miles from the border.
But witnesses said an Israeli air strike hit one of the few remaining crossings over the river early on Saturday. Amid growing concern about the plight of civilians in Lebanon, Israel said it would ease humanitarian access.
UN relief agencies have called for safe passage to take in food and medical supplies. An estimated half million people have fled their homes.
Foreigners have also flooded out of the country. Ships and aircraft worked through the night scooping more tired and scared people from Lebanon and taking them to Cyprus and Turkey.