Israel and Hezbollah exchanged fire along the Lebanese border after a week of rising tensions, sparking fears of an escalation and prompting concern from world powers.
Israel said it responded with around 100 artillery shells on Sunday after Hezbollah fired two or three anti-tank missiles at a battalion headquarters and military ambulance, hitting both.
Israeli officials refuted claims by the Iranian-backed movement that it had killed and wounded those inside the military vehicle, saying there were no casualties.
"We are consulting about the next steps," Israeli Prime Minister Benjamin Netanyahu said.
"I have ordered that we be prepared for any scenario."
The UN called for restraint and France said it had made "multiple contacts" to avert an escalation.
The US voiced concern over the "destabilising role" of Iranian proxies in the region and said it "supports Israel's right to self defence", a State Department official said.
"Hezbollah should refrain from hostile actions which threaten Lebanon's security, stability and sovereignty," the official added.
Earlier Lebanon's Prime Minister Saad Hariri contacted senior US and French officials to urge their countries and the international community to intervene.
Hours after the flare-up, Israeli military spokesperson Jonathan Conricus said the "tactical event" near Avivim, an Israeli community near the Lebanese border, was most likely over but that the "strategic situation is still ongoing".
Israel had targeted the unit that fired the missiles, he said.
Hezbollah said its fighters had "destroyed a military vehicle on the road to the Avivim barracks, killing and wounding those inside".
Its Al-Manar TV said the group targeted a Wolf armoured vehicle that can fit eight soldiers.
After the initial reports of fire from Lebanon, an Israeli military spokesperson said Israelis living within 4km of the border should remain at home and prepare shelters.
Tensions have risen in the last week between Israel and its enemy Hezbollah, the Lebanese Shi'ite movement backed by Iran.
Hezbollah chief Hassan Nasrallah said on Saturday his movement had decided to respond to an alleged Israeli drone attack on the group's Beirut stronghold.
The pre-dawn August 25 attack involved two drones - one exploded and caused damage to a Hezbollah-run media centre and another crashed without detonating due to technical failure.
Israel has not claimed responsibility for the incident, which came after it had launched strikes in neighbouring Syria to prevent what it said was an impending Iranian drone attack on the Jewish state.
Hezbollah says two of its members were killed in that strike.
On Thursday, Israel accused Iran of collaborating with Hezbollah to build precision-guided missiles.
A source connected to Hezbollah called Sunday's missiles a response to those deaths and said a reaction to the alleged drone attack would take place in the air.
Israel has carried out hundreds of strikes against what it says are Iranian and Hezbollah sites in neighbouring Syria since the civil war began there in 2011.
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