Israeli forces have pounded Gaza since a group of Palestinian militants kidnapped the Israeli soldier Gilad Shalit on June 25 and demanded the release of Palestinian prisoners in exchange for him.

But the overnight bombing was the most serious single attack of the campaign, which has so far killed more than 60 Palestinians, including at least 12 civilians.

The capture of Israeli troops would be a major coup for Hizbullah, which has engaged in sporadic fighting with Israeli forces along the Lebanese border since they withdrew from southern Lebanon in 2000.

Hizbullah said that it had seized the soldiers in an attempt to secure the release of some of the 9,000 Palestinian prisoners held in Israeli jails under military laws.

"Fulfilling its pledge to liberate the prisoners and detainees, the Islamic Resistance ... captured two Israeli soldiers at the border with occupied Palestine," the group said in a statement. "The two captives were transferred to a safe place."

If the reported captures are confirmed, they would heighten tit-for-tat tensions in the Middle East. The capture of Corporal Shalit has sparked the biggest Israeli incursion into Gaza Strip since settlers and security forces were withdrawn from the territory in August 2005.

Immediately after the reported capture, Hamas' top Lebanon official, Osama Hamdan, said the situation improved the position of his group over the prisoner exchange issue.

"What happened has strengthened the issue of the captives, and the enemy will submit to our choice, which is the exchange of the captives in return for the release of the soldiers," he said.

Israel has rejected a prisoner exchange to secure the release of Cpl Shalit, although senior political figures have hinted that such a tactic might eventually be inevitable.

The Israeli military has insisted that the Palestinian authorities hand over the kidnapped soldier, although there are questions over how much control the Palestinian leadership has over Gaza.

The London-based Arabic newspaper Asharq al-Awsat today reported that the Palestinian president, Mahmoud Abbas, had threatened to quit his position and leave the Palestinian territories in a phone conversation with the US secretary of state, Condoleezza Rice.

Israeli officials linked the overnight bombing in Gaza to the campaign to track down the people who ordered Cpl Shalit's kidnapping.

The quarter-tonne bomb hit the home of the Hamas activist Nabil Abu Salmiyeh, a lecturer at Gaza City's Islamic University, but Israeli officials said it was intended for Mohammed Deif, the leader of Hamas' military wing. Members of Hamas' military wing were among three factions that took part in the capture of Cpl Shalit.

Hamas officials said that the intended targets had escaped the scene of the 2.30am bombing, but later confirmed that one of their Gaza commanders, Raad Saed, had been wounded.

Israeli forces claimed that Mr Deif had been wounded along with Ahmed Ghandour, a commander reportedly involved in the June 25 kidnap.

Palestinians said that Israel had also fired a rocket at a car driving away from the scene, but added that the two occupants had managed to get away.

The two-storey house was reduced to rubble and rescue teams frantically searched through the wreckage for survivors while a neighbouring house was close to collapse. The force of the blast had shattered nearby windows and flying masonry had blown holes in the walls of other buildings.

Witnesses reported that the body of a child had been pulled from the wreckage of the house.

Israel defended the attack, saying that members of the Hamas military wing had been meeting in the house.

"Israel is compelled to take action against those planning to unleash lethal terror attacks against Israeli citizens," said David Baker, an official in the office of the Israeli prime minister, Ehud Olmert. "Palestinian terrorist leaders continue to take refuge amongst and hide behind their own civilians."

But the strike is likely to heighten international condemnation of Israel's reoccupation of Gaza Strip. Last week the EU and UN criticised Israel for "disproportionate use of force" against Palestinians in the territory, while the Swiss government alluded to the Geneva conventions on the laws of war in stating that the Israeli campaign amounted to "collective punishment".

The crackdown in Gaza has included the cutting off of water and power supplies, the destruction of bridges and damaged sanitation for local Palestinians.

Yesterday, Israeli troops pushed into the former Gush Katif Jewish settlement and tanks occupied Gaza's main north-south road, effectively cutting Gaza Strip in two.

The Lebanese group said on Wednesday that it had captured the pair to secure the release of detainees held in Israeli prisons.

"In order to fulfil a promise to free the prisoners and detainees, the Islamic Resistance captured at 9:05am [0605 GMT] two Israeli soldiers at the borders with occupied Palestine," Hezbollah said referring to its military wing.

"The two prisoners were moved to a safe place," it said.

The Israeli defense ministry confirmed the kidnapping and said it held the Lebanese government "directly responsible" for their fate and safe return.

Ehud Olmert, the Israeli prime minister, has convened an emergency meeting of cabinet ministers. He warned that those who try to test Israel's resolve would "pay a heavy price."

Separately, an Israeli security source said two Israelis had been killed in cross-border attacks by Hezbollah fighters.

The identities of the casualties were not immediately known.

Israel retaliates

Lebanese security sources said Israeli aircraft retaliated by bombing three bridges in southern Lebanon.

Two Lebanese civilians were killed and a Lebanese soldier was wounded in the air raid, Lebanese security sources said.

The Lebanese casualties occurred in the raid on the coastal Qasmiyeh bridge.

Meanwhile, Israel's army radio reported that ground forces had enterned Lebanon to search for the missing soldiers.

Hezbollah earlier fired dozens of Katyusha rockets and mortar bombs at Israeli border posts and a town, wounding four civilians, according to Israeli and Lebanese security sources.

Israeli gunners retaliated, firing salvoes of artillery shells into the outskirts of four Lebanese border villages while Israeli soldiers exchanged gunfire with guerrillas in the area.

The fighting apparently began when at least two rockets fired from south Lebanon exploded near Shlomi, an Israeli frontier town about 15km east of the Mediterranean coast.

Hezbollah fighters also attacked Israeli posts in the Israeli-occupied Shebaa Farms area to the east, Lebanese security sources said.

The Hezbollah attack coincided with the Israeli invasion in Gaza, ordered partly in retaliation for the abduction by Palestinian fighters earlier this month of a soldier from a border post.

Shortly before the airstrike, two Israeli drones fired two rockets at the same time at a training camp, which belongs to the al-Aqsa Martyrs Brigades, the armed wing of the Fatah movement, in northern Gaza Strip.

Palestinian witnesses said that a group of militants in the camp managed to escape from the area without injury.

Earlier, an Israeli pilotless drone attacked a group of militants who were launching a homemade rocket from Beit Hanoun in northern Gaza Strip near the border with Israel.

The militants are members of an armed group called "Al-Fateh al-Mubein."

The group said in a leaflet that its militants launched a homemade rocket at Israel, and the Israeli attack lightly wounded one militant.

In the West Bank city of Nablus, Palestinian residents of the village of Aseera al-Shamaleya said that the Israeli army stormed the village and detained three Palestinians.

The residents said that Israeli soldiers discovered an explosive device in one of houses and blew it up, adding that the house was destroyed.

In the West Bank city of Ramallah, two Jewish settlers were lightly injured after Palestinian youth threw stones at their car, Israel Radio reported.

"We are already responding with great strength ... The cabinet will convene tonight to decide on a further military response by the Israel Defense Forces," he added.

The Israeli prime minister also vowed a "very painful and far-reaching" response, adding that Israel would not negotiate over the fate of two soldiers who went missing during the border violence.

Earlier, Hizbollah claimed that it had kidnapped two Israeli soldiers, demanding Israel release prisoners held in Israeli jails in exchange for the two soldiers.

Israel has begun fresh air strikes in the Gaza Strip after pledging to intensify its military offensive on the territory that has killed 51 Palestinians in two weeks.

One Palestinian was killed and four others wounded in a series of Israeli air strikes in the northern industrial zone of Bait Hanun, medics said on Tuesday.

The Israeli military confirmed an air raid in the Bait Hanun area of northern Gaza, the site of two earlier strikes on Tuesday.

The dead man was named Ahmed Shahid, who was struck by a missile fired towards a car, the sources said.

Israeli aircraft also carried out two overnight air strikes against a bridge in the northern Gaza Strip and against a "gunman" west of the Karni transit point for goods entering and leaving the Palestinian territory, a spokesman said.

Ground troops are massed on the eastern and northern border of the impoverished territory - one of the most densely populated areas on earth - and are also stationed east of Gaza City and in the south near a defunct airport.

Israel says the massive operation is to secure the release of a captured soldier on June 25, and halting Palestinian rocket attacks.

Palestinian medics said on Tuesday that patients treated in Shifa hospital in Gaza and bodies at the mortuary presented unusual burns, raising concerns that Israel was using chemical weapons.

Meanwhile, Israeli defence sources said the government had given the military the green light to continue and, if necessary, intensify the so-called Summer Rain offensive with infantry and armour poised to carry out "in depth" incursions.

The approval was granted during consultations late on Monday between Ehud Olmert, the Israeli prime minister, and the defence minister, Amir Peretz, who faced their biggest test since the new Israeli government took office on May 4.

Olmert is due to hold talks with military commanders on Tuesday with a view to continuing the offensive, the largest operation since Israel pulled out of the Gaza Strip in September.

Chemical weapons?

In Shifa hospital, Dr al-Saqqa said most of the dead bodies taken to the facility were torn apart and completely burnt.

"Even bodies of the injured have been almost completely burnt. They have been deformed in a very ugly way that we have never seen before," he told Aljazeera channel.

Al-Saqaa, who heads the hospital's emergency service, said relatives had been unable to identify the dead victims.

"When we try to X-ray dead bodies, we find no trace of the shrapnel that hit the person killed," he said, adding that the bodies seemed to have been chemically burnt.

"We are sure that Israel is using a new chemical or radioactive weapon in the new operation. More than 25% of the injured are children, aged under 16."

Four teenagers playing football were among the dead on Monday.

At least 51 Palestinians have been killed since the operation started two weeks ago. An Israeli soldier also died as a result of "friendly fire", according to the Israeli military.

No end in sight

On Monday, Khaled Meshaal, the political leader of Hamas, demanded a prisoner swap for freeing the captured soldier but Olmert said that would be a "major mistake".

Hamas's armed wing - along with two other militant groups, the Popular Resistance Committees and the Army of Islam -claims to be holding the soldier.

Olmert has rejected international accusations that the response to the soldier's capture was disproportionate, saying that Israel's pullout from Gaza after 38 years of occupation has been followed only by continued violence.

Aid groups have expressed concern about the difficulties of providing assistance to 1.4 million people living in Gaza after months of financial difficulties and the suspension of direct Western aid to the Hamas-led government.

Junichiro Koizumi, the Japanese prime minister, is due to arrive in the region on Tuesday for separate talks with Olmert and the Mahmoud Abbas, the Palestinian president, on a trip he hopes will help to calm the situation.

The ministry called upon the international community and the humanitarian organizations to send an international medical community to examine the victims and confirm the truth about these banned weapons that Israel appears to be using.

The ministry showed that most of the injuries which the hospitals receive result from huge explosions which cause burning and severing of limbs, including the inner parts of the body. This causes long term deformations.

It is added that doctors in Gaza have been forced to amputate limbs of at least 12 injured Palestinians as a result of injuries sustained in the current Israeli offensive on the Strip.

The army spokesman, Avichia Auz'i refused to tell our correspondent in Jerusalem whether Israel actually started to use a new type of missiles. He said: "When the army uses such missiles, it won't reveal it simply because armies do not reveal the weapons they use. Yet, we are always developing our weapons in order to avoid hitting civilians"

He added: "I just want to confirm that we are using traditional weapons only, regardless of the Palestinian allegations."

In regard to Olmert's endorsement of a comprehensive incursion of Gaza, he answered that the army is performing a major operation "Summer Rain" and every thing is a part of that operation. In addition, he said, "we don't intend to stay in Gaza."