Two Israeli soldiers have been killed in a Hezbollah strike on an army convoy near the Lebanese border, the military said.
Another seven soldiers were wounded in the attack, officials said, and Israel's military responded to the anti-tank missile attack with aerial and ground attacks on Hezbollah positions in Lebanon.
A Spanish United Nations peacekeeper was killed in the clashes.
The Lebanese Hezbollah group said it fired a missile that hit an Israeli military convoy earlier today, prompting an apparent retaliation from Israel, which fired at least 50 artillery shells into Lebanon in a significant escalation along the volatile border.
Hezbollah said its fighters destroyed a number of vehicles carrying Israeli officers and soldiers and caused casualties among "enemy ranks".
It said the attack was carried out by a group calling itself the "heroic martyrs of Quneitra", suggesting it was retaliation for an Israeli air strike on the Golan Heights on January 18 that killed six Hezbollah fighters and an Iranian general.
The Israeli military said an anti-tank missile hit a military vehicle near the Lebanese border, and said residents of the area had been ordered to remain in their homes.
The attack took place near Mount Dov and Shebaa Farms, a disputed tract of land where the borders of Israel, Lebanon and Syria meet.
Two Lebanese officials said the Israeli shelling targeted the border villages of Majidiyeh, Abbasiyeh and Kfar Chouba, near the Shebaa Farms area.
Families living on the border of the villages fled, Lebanese officials said.
One of the officials said the incident was a "sophisticated Hezbollah operation" targeting Israeli vehicles along the border.
The attack comes shortly after Israel launched air strikes targeting Syrian army artillery posts in response to rockets fired the previous day into the Israeli-held Golan Heights.
Israel has declined to comment on any connection to the January 18 air strike, but has braced for a response to the strike, beefing up its air defences and increasing surveillance along its northern frontier.
Israel says the Chebaa Farms is part of the Golan Heights, which it captured from Syria in 1967. Lebanon and Syria say the enclave belongs to Lebanon, while the United Nations says the area is part of Syria and that Damascus and Israel should negotiate its fate.
The latest salvos raised the possibility of renewed fighting along the Lebanese-Israel border, which has remained mostly quiet since a month-long war in summer 2006. Since then, Israel has responded with air strikes and artillery fire following a number of rocket attacks and shootings but the violence remained contained.