Hizbollah retaliated for Israeli "massacres" by firing 60 rockets at Nahariya in northern Israel. A civilian was killed and 27 were wounded, including children, Israeli medics said.

The violence was the worst between Israel and Lebanon since 1996 when Israeli troops still occupied part of the south. It coincided with a major Israeli offensive into the Gaza Strip to retrieve a captured soldier and halt Palestinian rocket fire.

Despite the flare-up in Lebanon, Israel signaled no let-up in its Gaza assault, mounting an air strike that destroyed the office of Palestinian Foreign Minister Mahmoud al-Zahar. At least 24 Palestinians were killed in Gaza on Wednesday.

Israeli aircraft bombed runways at Beirut's Rafik al-Hariri International Airport, forcing flights to divert to Cyprus.

An Israeli military spokesman announced a naval blockade of Lebanese ports, saying they were used to transfer "terrorists and weapons to the terror organizations operating in Lebanon".

Dawn air strikes in south Lebanon earlier killed at least 44 civilians, including more than 15 children, and wounded 100 people, security sources said. Ten members of a family were killed in Dweir village and seven family members died in Baflay.

A Lebanese army soldier was also killed. Israeli air strikes on Wednesday killed two civilians and a Hizbollah fighter. More than 20 bridges have been hit, with most heavily damaged.

"DISPROPORTIONATE"

The United States urged restraint on both sides but said Israel had a right to defend itself. "We are urging restraint on both sides, recognizing Israel's right to defend itself," a U.S. official said, speaking on condition of anonymity.

France criticized Israel's campaign in Lebanon, including the attack on the airport, as "a disproportionate act of war".

Arab foreign ministers will meet in Cairo on Saturday to discuss Israeli attacks on Lebanon and the Palestinian territories, the Arab League said.

Hizbollah, which is backed by Iran and Syria, said it had fired 60 rockets at Nahariya "in response to the massacres of civilians in the south and assaults on infrastructure".

Israel's Magen David Adom ambulance service said a 40-year-old woman was killed when a rocket hit her house.

The violence rattled financial markets in Israel and Lebanon with investors worried that it might worsen, or spread to Syria.

The Israeli shekel lost as much as two percent against the dollar and shares lost four percent in early trade.

Pressure on the Lebanese pound increased. Beirut stocks slumped in panic selling, with Lebanon's biggest company Solidere shedding 15 percent, the maximum permitted.

Two hours after the airport raid, an Israeli helicopter fired a missile at the headquarters of Hizbollah's al-Manar TV in the Beirut suburb of Haret Hreik, wounding six people.

One of the wounded was an al-Manar employee, the station's director said. The building, in a Shiite neighborhood where Hizbollah leaders also have offices, was slightly damaged.

Israeli aircraft later attacked an al-Manar relay tower south of Baalbek in eastern Lebanon, killing one person and wounding four, witnesses said.

Israel had promised a "very painful" response after Hizbollah seized two soldiers and killed eight on Wednesday.

DOMESTIC PRESSURE

The Israeli assault will increase domestic pressure on Hizbollah, which has refused to disarm in line with a 2004 U.N. resolution, and add to international calls on the Lebanese government, led by an anti-Syrian coalition, to act.

Michael Karam, editor of a Lebanese business magazine, said Hizbollah's actions were ill-considered. "Now we've got no airport, so no tourism and no prosperity," he added.

The Hizbollah attack, which Israel blames on Lebanon, tore up tacit understandings that had limited border violence for six years since Israeli troops left the south.

Lebanese Prime Minister Fouad Siniora has said his government did not endorse the Hizbollah attack.

Apart from the Israeli attack on the Foreign Ministry building in Gaza, a separate air strike near Deir el-Balah in the central Gaza Strip killed an Islamic Jihad militant and wounded another gunman, Palestinian security officials said.

Hizbollah leader Sayyed Hassan Nasrallah said the two soldiers had been seized to force Israel to release prisoners.

Israel, which traded prisoners with Hizbollah in 2004, insisted it would discuss no such swap.

(Additional reporting by Alaa Shahine, Lin Noueihed and Laila Bassam, and Jerusalem bureau)