Japanese Prime Minister Junichiro Koizumi urged Israel to show restraint and not seek "an eye for an eye" Wednesday after two Israeli soldiers were captured by Hezbollah guerrillas along the northern border.

Israeli Prime Minister Ehud Olmert called the attack, which took place just before he and Koizumi met for an hour of talks Wednesday morning, an "act of war" and vowed a potent response.

"I understand the anger of the Israelis," Koizumi said in joint press conference after his talks with Olmert. "But I hope you will not seek an eye for an eye and keep in mind the importance of peace."

The attack and escalating violance in Gaza completely overshadowed plans by Koizumi, the first Japanese leader in 11 years to visit Israel, to push a proposal to bolster co-existence and co-prosperity between Israel and the Palestinians in meetings with Olmert and Palestinian President Mahmoud Abbas.

Koizumi said he would still like to pursue those plans "when the time is appropriate."

Koizumi was to hold talks with Abbas, a moderate, on Thursday before flying to Jordan and then to St. Petersburg, Russia on Saturday to attend the G-8 economic summit.

His summit with Olmert came as violence was erupting both to the north and south.

Koizumi and Olmert met just hours after Israel's air force dropped a quarter-ton bomb on a residential building in Gaza, killing at least nine civilians, including a four-year-old boy. The target of the air strike had been top Hamas militants meeting in the building, but Hamas said its top fugitive got away.

Japanese officials in the delegation have stressed they have no plans to meet with any representatives of Hamas, the Islamist group that won elections in January and now controls the Palestinian government.

Hamas has been called a terrorist organization by the United States, and does not recognize Israel.

At about the same time as the Gaza bombing, Hezbollah guerrillas captured two Israeli soldiers in an attack along the Lebanese border.

"I respect his decision to meet with me at such a time," Koizumi said of Olmert. "Israel's crisis management is very solid."

For Koizumi's visit, Japan announced new aid to the Palestinian side of roughly $30 million, focused on medicine, sanitation and creating jobs. Delegation officials, expressing concern over the deteriorating situation in Gaza, said the aid would be directed at helping Palestinians who have been most affected by the rising violence.

Tokyo's $833 million in aid to the Palestinians over the past 12 years already makes Japan the third-largest donor after the United States and the European Union.

Earlier in the day, Koizumi paid his respects at a Holocaust memorial where he saw a tree planted in memory of Japanese diplomat Chiune Sugiura, who used his clout to help save Jews escape from Nazi gas chambers.