BEIRUT, Lebanon (AP) – Hezbollah militants crossed into Israel on Wednesday and captured two Israeli soldiers. Israel responded in southern Lebanon with warplanes, tanks and gunboats, and said seven of its soldiers had been killed in the violence.

Israeli Prime Minister Ehud Olmert called the soldiers’ capture “an act of war,” and his Cabinet prepared to approve more military action in Lebanon _ a second front in the fight against Islamic militants by Israel, which already is waging an operation to free a captured soldier in the Gaza Strip.

The Israeli army said three soldiers were killed in the initial raid, and four others were killed when their tank went over a land mine in southern Lebanon.

Olmert said he held the Lebanese government responsible for the two soldiers’ safety, vowing that the Israeli response “will be restrained, but very, very, very painful.”

Hezbollah leader Sheik Hassan Nasrallah said he will not release the captives except as part of a prisoner swap. He said the two soldiers were “in a safe and very far place.”

“No military operation will return them,” he told a news conference in Beirut. “The prisoners will not be returned except through one way: indirect negotiations and a trade.”

Israeli jets struck deep into southern Lebanon, blasting bridges and Hezbollah positions and killing two civilians, the Lebanese officials said.

The Israeli military planned to call up thousands of reservists, and residents of Israeli towns on the border with Lebanon were ordered to seek cover in underground bomb shelters.

The Israeli stock market plunged on word that two more soldiers were captured and that Israel was getting entangled in a second front against Lebanese guerrillas. The exchange’s TA-25 blue chip index sank as much as 4.9 percent in exceptionally heavy trading. It rose slightly in afternoon trading to close down 4.2 percent.

The United States, U.N., European Union, France and Germany expressed deep concern about the fighting. U.N. Secretary-General Kofi Annan called for the immediate release of kidnapped Israeli soldiers and condemned Israel’s retaliation in southern Lebanon.

Secretary of State Condoleezza Rice said the Hezbollah action went against the interest of the Lebanese people, and that Syria has a “special responsibility” to resolve the crisis.

“All sides must act with restraint to resolve this incident peacefully and to protect innocent life and civilian infrastructure,” she said ahead of meetings in Paris.

Separately, Israel escalated its Gaza assault, killing 23 people.

Israeli attacks in the central Gaza town of Deir Al-Balah killed 12 people, while two people were killed in separate incidents elsewhere in Gaza.

Israel also dropped a quarter-ton bomb on a home in Gaza City before dawn to try to kill top Hamas fugitives. Palestinian hospital officials said the blast killed nine members of a family _ seven children and two parents.

After initially claiming its leaders had escaped harm, Hamas militants took over the intensive care unit of Gaza City’s main hospital, where doctors said seven militants were in critical condition. The gunmen refused to say who was being treated.

The Israeli military said Mohammed Deif, the leader of the Hamas military wing and No. 1 on Israel’s wanted list for more than a decade, was among the wounded.

The Shiite Lebanese Hezbollah said it captured the two soldiers to help win the release of prisoners held in Israel. Hamas had made identical demands in seizing Cpl. Gilad Shalit on June 25.

A top Hamas leader said his movement did not coordinate with Hezbollah over the capture of the soldiers but said it was “natural” for the groups to work together against Israel.

“Now Israeli has to decide on its choices,” Osama Hamdan, Hamas’ spokesman in Lebanon, told The Associated Press. “It is early to talk about details of the exchange, but no doubt the operation carried out by Hezbollah today will strengthen our demands to exchange the captives.”

Israel, however, appeared determined to win freedom for its troops with a show of force.

Army Chief of Staff Lt. Gen. Dan Halutz warned the Lebanese government that the Israeli military will target infrastructure and “turn back the clock in Lebanon by 20 years,” if the soldiers were not returned, Israeli TV reported.

Israeli troops crossed into a southwestern sector of Lebanon, across the border from where the soldiers were seized, trying to keep their captors from moving them deeper into Lebanon, Israeli security officials said.

Israeli warplanes and gunboats blasted bridges and Hezbollah positions in south Lebanon, killing two civilians, the Lebanese security officials said.

The Israeli jets made their deepest foray in an afternoon strike on a road in the Zahrani region along the Mediterranean coast _ about halfway between the border and the capital of Beirut. Anti-aircraft guns opened fire on jets flying over the coastal city of Sidon.

The Arab League planned an urgent meeting on the crisis Thursday amid “fears of widening of tension and possible Israeli strike against Syria,” which backs Hezbollah, a senior league official in Cairo said, speaking on condition of anonymity because of the sensitivity of the issue.

Syrian Vice President Farouk al-Sharaa blamed Israel for the escalating violence in Lebanon and the Palestinian territories and denied his country had a role in either abduction.

“It’s up to the resistance _ both the Lebanese and the Palestinian _ to decide what they are doing and why are they fighting,” he told reporters in Damascus.

U.S. Assistant Secretary of State David Welch, visiting Cairo, said the capture of the two Israeli soldiers was “a very dangerous escalation” that “puts at risk all the effort that’s being put forth by many to find a solution to the current situation.”

Jubilant residents of south Beirut, a stronghold of Hezbollah, and Palestinians in the Ein el-Hilwa refugee camp fired guns in the air and set off firecrackers in celebration after the capture of the Israeli soldiers was announced.

The top U.N. official in Lebanon, Geir Pedersen, met with Lebanon’s prime minister and denounced Hezbollah’s incursion across the border into northern Israel, known as the Blue Line.

“Hezbollah’s action escalates the already tense situation along the Blue Line and is an act of very dangerous proportions,” he said in a statement.

Elsewhere, Israeli troops killed a Hezbollah guerrilla as he tried to infiltrate a military base in northern Israel. The army said Hezbollah also fired rockets toward the Israeli border. There were no reports of injuries.

Hezbollah’s military arm said its fighters captured two Israeli soldiers “on the border with occupied Palestine, fulfilling the promise to liberate its prisoners” held by Israel.

Hamas-linked militants have demanded the release of at least some of the estimated 9,000 prisoners held by Israel in exchange for Shalit’s freedom. Israel has carried out several prisoner swaps with Hezbollah in the past to free captured Israelis.

Israel occupied a small strip of southern Lebanon for 18 years before withdrawing in 2000 amid public complaints in Israel. Hezbollah fighters have controlled the Lebanese side of the border with Israel since then. Israel and Hezbollah have been clashing for two decades and still fight over a small sliver of border territory _ Chebaa Farms.

Lebanon is under U.N. and U.S. pressure to disarm the Shiite guerrilla group and move its own military into the south, but the government has refused to do so, calling Hezbollah a legitimate resistance group.