Israeli ground troops fought Hezbollah guerrillas inside Lebanon on Thursday as the Israeli army said a full-scale invasion of its northern neighbour is still a possibility to destroy Hezbollah's military capacity.

Israel says two of its soldiers died in the clash. Two Hezbollah fighters also died, according to the militant group.

Missiles from Israeli warplanes destroyed houses overnight in the southern Lebanese village of Zebdine.
(Lefteris Pitarakis/Associated Press)

Capt. Jacob Dallal, a spokesman for the Israeli army, said Thursday that the military operation against Hezbollah is not over by any means.

"At the moment, it's a very limited, specific incursion, but all options remain open," Dallal said.

An Israeli military radio station has warned hundreds of thousands of residents of southern Lebanon to leave "immediately," prompting speculation that a big ground operation to secure a buffer zone might soon begin.

Thursday's action marked the second day in a row that Israeli troops moved into Lebanon, part of a continuing offensive that began after Hezbollah militants captured two Israeli soldiers on July 12.

Since then, Israeli forces have been bombing and shelling Hezbollah targets daily in the suburbs of Beirut and southern Lebanese towns. Hezbollah has responded with dozens of rocket attacks on northern Israeli cities and towns.

No release of soldiers: Hezbollah

In an interview with Al-Jazeera, Hezbollah leader Sheikh Hassan Nasrallah said the two captured Israeli soldiers would not be released without indirect negotiations for an exchange of prisoners. Nasrallah also said recent Israeli bombings and air strikes did not harm his organization.

"I can confirm without exaggeration," he said, "that the leadership structure of Hezbollah has not been hurt. All this Israeli talk that they hit 50 per cent of our rocket capabilities and warehouses, this talk is wrong and nonsense."

The Al-Jazeera correspondent who interviewed Nasrallah said he did not know where he was taken to film the Hezbollah leader. Israeli commentators have said one of the prime objectives of Israel's military campaign is to kill or capture Nasrallah.

At least 335 killed

The offensive has killed at least 306 people in Lebanon and 29 in Israel, where the death toll includes 14 soldiers. The United Nations said at least half a million people have been displaced in Lebanon.

UN Secretary General Kofi Annan said "hostilities must stop" between Israel and Hezbollah. In comments to the UN Security Council, he slammed Israel's "excessive use of force" against Lebanon and Hezbollah's "provocative" attacks.

"There are serious obstacles to reaching a ceasefire or even to diminishing the violence quickly," Annan said.
 
The Russian Foreign Ministry also criticized the Israeli offensive, saying its actions have gone "far beyond the boundaries of an anti-terrorist operation." It also called for a ceasefire.

In other developments on Thursday:

• Hezbollah claimed to have destroyed two Israeli tanks near the Lebanese border village of Maroun al-Ras.
• Israeli jets struck houses believed used by Hezbollah in the Lebanese town of Hermel, wounding three.
• Fighter jets destroyed a five-storey building allegedly used by Hezbollah in the city of Baalbek.
• Israel dropped leaflets in south Lebanon warning trucks they will be suspected of carrying weapons and could be targets.
• Two Israeli Apache helicopters collided near the border with Lebanon in what's thought to be an accident; five military personnel were injured.

Action in Gaza Strip

Israel also continued its military campaign in the Gaza Strip Thursday, which began last month when the militant group Hamas captured an Israeli soldier during a cross-border raid.

Israeli aircraft fired a missile at Palestinians in a refugee camp in the territory, leaving at least one person dead and five others injured.

The Israeli army says the strike was aimed at Palestinian militants who were planning to fire rockets into Israel. The Associated Press said some of the injured were civilians, although one was a man wearing military fatigues.

Early on Friday, Israeli tanks and ground forces withdrew from the area of the refugee camp in northern Gaza. Israeli forces remain deployed south of the Palestinian enclave.

Since it began on June 28, the Israeli campaign to free the soldier captured by Hamas has left 110 Palestinians dead, at least half of them militants, according to Israeli sources.

With files from the Associated Press