"They will only return home through indirect negotiations and an exchange of prisoners," Nasrallah said in a press conference, hours after his Hizbullah militia captured two Israeli soldiers in a cross-border raid.

Nasrallah proposed a package deal in which the two Israeli soldiers, along with a third captured by Palestinian militants in Gaza on June 25, would be traded for Arab prisoners in Israeli jails.

"What we did today is the only feasible way to free detainees from Israeli jails," he added.

Nasrallah also warned that it would be an "illusion" if Israel wanted to free the soldiers by military campaign.

However, Israeli Prime Minister Ehud Olmert has rejected any negotiations on the fate of the captive soldiers and vowed to give a "very painful and far-reaching" response to the assailants.

Clashes broke out early Wednesday between Hizbullah militia and Israeli army at border area in south Lebanon shortly after several rockets fired from Lebanon into northern Israel.

Israeli sources confirmed that during the attack, seven Israel Defense Forces (IDF) soldiers were killed and two others were captured.

Some four Lebanese were also killed on Wednesday in the clashes between the two sides, according to media reports.