Israel and its closest ally the US have warned Hezbollah against opening a second front as Israel battles Hamas in Gaza.
Lebanon's Iran-backed Hezbollah group said it fired missiles on Israel Wednesday drawing retaliatory Israeli fire, after three of its members were killed earlier this week amid soaring border tensions.
The exchange of fire came as Israel massed troops and heavy armour around Gaza in its retaliatory campaign against Hamas militants in a conflict that has left hundreds dead on both sides.
"Hezbollah targeted a Zionist (Israeli) position... facing Dhayra village, with guided missiles, in a "irm response to Zionist attacks... which led to the martyrdom of a number of brothers," the group said in a statement.
The group warned of a "decisive" response to Israeli attacks "targeting our country and the security of our people, especially when these attacks lead to the deaths of martyrs".
The Israeli military said that "in response to the anti-tank missile fired at Israel Defence Forces (IDF) soldiers a short while ago, an IDF aircraft struck a military observation post belonging to the Hezbollah in Southern Lebanon".
"Israeli artillery shelled the area from which the launch originated," the military added.
Lebanon's National News Agency (NNA) said three civilians had been wounded by Israeli fire on a border village, adding that "around 10 houses have been directly hit".
An AFP correspondent in the border village of Dhayra earlier reported shelling close to residential areas that triggered fires in nearby groves.
The NNA said Israeli fire on several locations along the border had been "countered by resistance (Hezbollah) machine guns".
On Monday, Hezbollah said three of its members had been killed in Israeli strikes on south Lebanon after Palestinian militants tried to slip across the border.
Both Israel and its closest ally the United States have warned Hezbollah against opening a second front as Israel battles Hamas in Gaza.
"The Israeli army is prepared for any scenario", spokesman Daniel Hagari told reporters.
"Hezbollah is observing what Israel is doing in Gaza, it sees the volume of the destruction. Hezbollah sees this and understands," he said.
Israel has been retaliating to daily fire from Lebanon, which began after Hezbollah launched rockets on a disputed border area on Sunday.
The Lebanese army said it had found "the rocket launcher that fired a number of rockets" on Tuesday -- an attack that Hamas said it carried out.
In Israel, the death toll from Hamas's shock cross-border assault rose to 1,200, the great majority of them civilians, while Gaza officials reported 1,055 people killed as Israel pounded the territory with air strikes.
In 2006, Hezbollah and Israel fought a devastating 34-day war that left more than 1,200 people dead in Lebanon, mostly civilians, and 160 in Israel, mostly soldiers.