Lebanon's prime minister has said only one person was killed in an Israeli air strike that earlier he said had killed more than 40 civilians.
Many of those stranded in Tyre are poor and elderly
"They thought that the whole building smashed on the heads of 40 people," Fouad Siniora told reporters in Beirut. "Thank God that they have been saved."
Later, a UN spokesman said five people had died in the attack in the southern border village of Houla.
Several houses were reported to have been destroyed in the air strike.
At least 25 people have died in fresh Israeli raids across Lebanon.
After nightfall, at least five people were killed and several wounded in an Israeli air strike in southern Beirut, police said.
Three Israeli soldiers were killed in clashes in the southern Lebanese village of Bint Jbeil, the Israeli military said, adding that five Hezbollah militants were also killed.
Diplomats are battling to find a workable truce amid the violence.
Arab ministers have agreed to back Lebanese demands for changes to a proposed UN resolution on the crisis.
President Bush said he wanted the resolution passed as soon as possible.
Earlier, Mr Siniora broke down in tears as he told Arab leaders meeting that a "horrific massacre" had taken place in Houla village.
He later backtracked on the death toll, telling a news conference that only one person had died.
One resident quoted by Reuters news agency said about 50 people had been found alive under the rubble.
The Israeli Defence Minister Amir Peretz has said Israel will step-up its offensive against Hezbollah rocket launching sites if the diplomatic process does not reach a successful conclusion.
More than 900 Lebanese, most of them civilians, have been killed in the conflict, the Lebanese government says. More than 90 Israelis, most of them soldiers, have also been killed.
Humanitarian groups say Israeli military action is hampering efforts to help many of the hundreds of thousands who have fled the fighting - sparked by the capture of two Israeli soldiers by Hezbollah on 12 July.
The Houla attack came as Israeli jets also hit southern Beirut and parts of the east and south, cutting off the coastal city of Tyre.
The BBC's John Simpson in Tyre says a crater now blocks the farm track used to transport food and medicine to the city.
The air attacks came amid further clashes on the ground, while Hezbollah fired more rockets at Israel.
United Nations sources say Israeli commandos have been on the border hilltops since Sunday, trying to destroy Hezbollah positions.
The Shia militia said it killed four Israeli soldiers near Houla, but Israel said a number of its troops were slightly wounded.
The clashes follow exchanges on Sunday, when Hezbollah rocket-fire killed 12 Israeli reservist soldiers in the town of Kfar Giladi and three people in the port of Haifa.
As fighting continues, UN Security Council members are gathering in New York for more talks on the resolution aimed at stopping the conflict.
President Bush, in Texas, said the concern of "all parties in the region is whether or not the resolution will create a vacuum into which Hezbollah and its sponsors will be able to promote more instability".
"We all agree that we ought to strengthen this government, the Lebanese government. That's the purpose of the resolutions as well as to stop the violence," he told reporters.
Security Council members are expected to discuss possible changes to a draft document to take account of Lebanese objections. Beirut is seeking a specific reference to a timetable for Israeli withdrawal from Lebanon.
Correspondents say no vote is likely until Tuesday at the earliest.
The text calls for an immediate cessation of hostilities and lays the groundwork for a second that would install an international peacekeeping force in southern Lebanon.
Senior Israeli officials have said they are broadly happy with the text.