Israeli commandos have clashed with Hezbollah fighters during a raid on the southern Lebanese city of Tyre.
Israel targeted Tyre from the air and the ground
The Israeli army said eight soldiers were wounded and several militants were killed in the operation.
Israel said it carried out more than 70 air strikes across Lebanon overnight, while Hezbollah fired more rockets at the Israeli city of Haifa on Saturday.
Meanwhile, the US and France have agreed on a UN Security Council resolution to end the fighting.
The full 15-nation Security Council was expected to meet later in the day to discuss the resolution, and it was likely to be adopted in the next couple of days, according to the US ambassador to the UN, John Bolton.
The details of the resolution are not yet known.
In further violence on Saturday, three people died when a rocket struck a house in the Galilee area of northern Israel, Israeli media report.
The Israeli army meanwhile has warned residents in the Lebanese city of Sidon to stay away from rocket launching sites.
Israeli troops raided an apartment block in Tyre, from where, officials said, long-range missiles had been launched at Israel hours earlier.
One missile hit the town of Hadera, 75km (50 miles) from the Israel-Lebanon border - the deepest strike into Israel so far.
Lebanese officials said a unit of commandos landed by helicopter near an orange grove in the north of the city before storming the building, the Associated Press news agency reported.
Reuters news agency quoted an unnamed Israeli naval officer as saying the guerrilla cell was on the second floor of a five-storey block in a densely populated neighbourhood.
"As we burst inside, we hit a number of terrorists inside the apartment with close-quarter shots and grenades," the officer was quoted as saying.
Hezbollah al-Manar television said Hezbollah fighters repelled the attack, showing pictures of spent bullets and a blood-stained concrete floor.
Israel said eight soldiers were wounded in the operation, two seriously. It said a number of Hezbollah militants were killed and several rocket-launchers destroyed.
Lebanese officials said a Lebanese soldier and at least four civilians were killed.
Hezbollah said it fired more missiles at Haifa in retaliation for the raid, leaving five people wounded.
Elsewhere, an Israeli soldier died after coming under Hezbollah mortar fire in the eastern village of Taibeh.
As the violence raged, diplomatic efforts to try to resolve the conflict continued.
David Welch's arrival in Beirut coincided with an anti-US protest
The US and France finally reached agreement on the wording of the UN Security Council resolution that could bring about a ceasefire, after days of talks.
UN Secretary General Kofi Annan had telephoned US President George W Bush and French President Jacques Chirac on Friday to express his concern about delays in reaching an agreement.
Diplomats said the differences had been over the timing of a truce - whether it would come before an international force was deployed - as France wanted - or along with the deployment.
Mr Chirac's office told the French news agency AFP an agreement had been reached, but no details were immediately available.
Meanwhile, US envoy David Welch held talks in Beirut with Lebanese Prime Minister Fouad Siniora and Lebanese parliament speaker Nabih Berri, the leader of the Shia Amal movement and a possible conduit to Hezbollah.
Mr Welch said his meeting with Mr Siniora was "an important step to putting behind us forever the terrible violence witnessed in the past three weeks, with a lasting political framework and an international force to support the Lebanese armed forces".
There was a heavy security presence close to the prime minister's office, in part because there was also a pro-Hezbollah demonstration in the square nearby, says the BBC's Nick Childs in Beirut.
As the fighting continues, aid agencies have warned of difficulties in delivering supplies to hundreds of thousands of people displaced by the fighting, after four bridges on the main coastal highway north from Beirut were destroyed on Friday.
"Now the main highway is bombed we have a major, major setback... it's like a de facto blockade at the moment," Astrid van Genderen Stort, spokeswoman for the UN refugee agency told the BBC.
She said the agency was looking at alternative routes for the distribution of aid, including bringing it in by air, but said the bombing of the road was slowing the process.
"Our warehouses are getting empty and we can't reach those people in need," she said.