Lebanese Hizbullah militia kidnapped two Israeli soldiers in a cross-border raid Wednesday morning, arousing a fierce response of Israeli army and bringing the regional tension up to a new height.

Seven Israeli soldiers were killed in the clashes between the Jewish troops and the Hizbullah militants, an Israeli army spokeswoman said on Wednesday.

Three soldiers were killed when the Hizbullah militants attacked two Israeli army jeeps patrolling along Israel's border with Lebanon Wednesday morning, in which the two soldiers were captured, the spokeswoman said.

Another four, who were searching for the two abducted soldiers in south Lebanon, were killed when their tank was attacked by Hizbullah militia, she added.

After the abduction, Hizbullah demanded that Israel release prisoners held in Israeli jails, Lebanese militant Samir Al-Kuntarin particular, in exchange for the two soldiers.

Hizbullah leader Sheik Hassan Nasrallah said the captive soldiers would only be released as part of a prisoner swap, adding that Israel's military campaign in Lebanon would not win the freedom of the hostages.

However, Israeli Prime Minister Ehud Olmert rejected to negotiate over the fate of two soldiers who went missing during the border violence, calling the attack "an act of war".

"It is an act of war by the state of Lebanon against the state of Israel in its sovereign territory," Olmert said at a news conference, vowing a "very painful and far-reaching" response.

Israeli troops traded fire with Hizbullah militia across the border after at least two rockets fired by Hizbullah hit northern Israel, wounding four Israelis.

Israeli tankers shelled Hizbullah strongholds and Israel Air Forces (IAF) aircraft pounded bridges, roads and a power plant in southern Lebanon in a bid to limit the militants' movement. IAF planes also hovered over the Lebanese capital of Beirut.

Some four Lebanese were also killed in the clashes between the two sides.

"The two captives were transferred to a safe place," Hizbullah said in a statement, without saying what condition the soldiers were in.

Israeli Defense Minister Amir Peretz demanded the Lebanese government act immediately to solve the crisis.

The Defense Ministry said in a statement that it held the Lebanese government "directly responsible" for their fate and safe return.

The IDF is preparing itself for an operational response on all fronts, pursuant to the situation's recent escalation.

Israeli media said that the IDF on Wednesday afternoon sent troops across the border to search for the missing soldiers, marking the first incursion into Lebanon since the withdrawal in May 2000, but an IDF spokesman said he could not confirm the report.

The IDF also ordered troops deployed on the Lebanon and Gaza borders on high alert in the event that armed groups may attempt to fire Katyusha and Qassam rockets into Israel.