Hezbollah's leader declared Friday that his group is ready for "open war" with Israel, and the guerrilla group attacked an Israeli warship positioned off Beirut's coast as his words were being broadcast.
In an audiotape aired on Hezbollah's Al-Manar television less than an hour after his Beirut home and offices were destroyed in Israeli airstrikes, Sheik Hassan Nasrallah addressed himself to Israelis, saying "You wanted an open war and we are ready for an open war."
"Look at the warship that has attacked Beirut, while it burns and sinks before your very eyes," Nasrallah said.
An unmanned Hezbollah aircraft rigged with explosives rammed into an Israeli warship, causing heavy damage to the vessel, Israeli military officials said.
The Israeli army said a missile ship carrying several dozen sailors suffered severe damage and was set on fire. Several hours after the attack, the fire was put out and the ship was being towed back to Israel, officials said. The military officials spoke on condition of anonymity because they weren't authorized to speak to the media.
According to media reports, the Israeli military is searching for four of its troops missing after the attack on the warship.
The Israeli military did not comment on those reports.
Israeli Prime Minister Ehud Olmert vowed to continue the offensive until the guerrilla group was neutralized.
Earlier Friday warplanes blasted more holes in the runways at Beirut's airport and destroyed mountain bridges on the main highway to Damascus. Israeli warships blockaded Lebanon's ports for a second day.
Smoke clouds rose over the capital after bombing runs ignited fuel tanks at one of Beirut's two main power stations. Glass windows in apartment buildings were shattered by strikes in south Beirut.
Hezbollah guerrillas responded with an intensified barrage of at least 50 Katyusha rockets throughout the day into northern Israeli towns, killing a woman and her grandson.
The death toll in three days of fighting rose to 73 killed in Lebanon — almost all civilians, including five who died in strikes in south Beirut and the south Friday — and 12 in Israel, including four civilians killed by Hezbollah rockets. The violence sent shock waves through a region already traumatized by the ongoing battles in the Gaza Strip between Israel and Hamas.
Olmert told U.N. chief Kofi Annan in a phone call that the offensive would not halt until Hezbollah guerillas are disarmed. But he agreed to allow U.N. mediation for a cease-fire — but only if the terms for the truce included the return of the soldiers and the disarming of the guerrillas, an official close to the premier said, speaking on condition of anonymity because he is not authorized to speak to the media.
At the same time, Israel sought to exact a price from the Lebanese government for allowing Hezbollah to operate freely in the south. Its strikes on the airport and roads and naval blockade all but cut off Lebanon from the world as it gradually increased the punishment to infrastructure.
But there were fears — acknowledged by U.S. President George W. Bush — that the Israeli assault could bring down the Western-backed, anti-Syrian government of Lebanon.
Bush, in Russia for the G-8 summit, spoke by phone with Lebanese Prime Minister Fuad Saniora and promised to pressure Israel "to limit damage to Lebanon ... and to spare civilians and innocent people from harm," according to a statement from Saniora's office.
But the promise fell short of the Lebanese leader's request for pressure for a cease-fire. The White House confirmed the call but would provide no details of the discussions.
French President Jacques Chirac said Israel's actions were "totally disproportionate" but also condemned Hezbollah's attacks. He implicitly suggested that Syria and Iran might be playing a role in the expanding crisis.
Iranian President Mahmoud Ahmadinejad warned Israel against expanding its campaign to attack Syria and said the Jewish state couldn't harm Iran.
"Despite the barbaric and criminal nature of the occupiers of Jerusalem, the regime and its Western supporters do not even have the power to give Iran a nasty look," he said.
Iran is a top ally of Syria and both countries back Hezbollah — leading to speculation by some that they were fueling the crisis. Israeli has warned Hezbollah might try to move its two Israeli prisoners to Iran.
Israeli officials said the air campaign against Lebanon was the biggest since the Israeli invasion in 1982. The only comparable military action since then was the "Grapes of Wrath" offensive in 1996, also sparked by Hezbollah attacks.
But the Lebanese casualties were mounting faster than in 1996, when at least 165 people were killed in 17 days of fighting, including more than 100 civilians who died in Israeli shelling of a U.N. base.
Israel holds the Lebanese government responsible for Hezbollah's actions, but Saniora's Cabinet has insisted it had no prior knowledge of the raid that seized the soldiers and that it did not condone it.
Hezbollah operates with near autonomy in south Lebanon, and the government has resisted international pressure to disarm it — a step that could break the country apart. Saniora's government is dominated by anti-Syrian politicians, some sharply critical of Hezbollah, but the guerrilla group also has two ministers in the Cabinet.
The fighting in Lebanon is Israel's second front after it launched an offensive in the Gaza Strip two weeks ago in response to the June 25 capture by Hamas militants of an Israeli soldier, Cpl. Gilad Shalit.
Throughout the morning, Israeli fighter-bombers pounded runways at Beirut's airport for a second day, apparently trying to ensure its closure after the Lebanese national carrier, Middle East Airlines, managed to evacuate its last five planes to Amman. One bomb hit close to the terminal building.
Another barrage hit fuel tanks at one of Beirut's two main power stations at Jiye. Some parts of the capital were already seeing electricity outages before the strike, which was likely to worsen power shortages.
For the first time in the assault, strikes targeted the crowded Shiite residential neighborhoods in south Beirut, a stronghold of Hezbollah's leadership.
An initial wave before dawn hit near Hezbollah's security headquarters and targeted roads, damaging two overpasses. The facades of nearby apartment buildings were shorn away, balconies toppled onto cars and the street littered by glass from shattered windows. Firefighters struggled to put out several blazes.
A young man with blood pouring down his face was shown on Lebanese TV walking out of a damaged apartment building.
An afternoon strike hit an apartment building near Hezbollah's Al-Nour radio station. The radio continued broadcasting, and Hezbollah TV showed smoke billowing from an apartment in the area and firefighters running toward the building.
"I have huge debts and now my store is damaged," said Fadi Haidar, 36, cleaning away broken glass at his appliances shop, which had an estimated $15,000 in damage.
Still, he supported Hezbollah and its leader, Nasrallah, in their decision to seize the soldiers.
"Israel is our enemy and every Muslim must make a sacrifice," he said. "As time goes by, they will all realize that Sayyed Nasrallah is right and is working in the interest of Muslims."
Warplanes also bombed the highway between Beirut and Damascus — Lebanon's main land link to the outside world — forcing motorists onto mountainside roads to the Syrian capital. Warships shelled the coastal highway north of Sidon, slowing traffic considerably but not actually cutting the road, witnesses said.
In northern Israel, 220,000 people hunkered down in bomb shelters amid Hezbollah's rocket barrage.
At least 50 rockets hit seven towns and communities in Israel, including Safad and Nahariya — where two people were killed a day earlier. Since Wednesday, 61 Israelis have been hurt in the rocket fire.
Many Israelis were shocked Thursday when two rockets hit Haifa, the country's third-largest city, 30 miles south of Lebanon. No guerrilla rocket had ever reached that far into Israel. Hezbollah denied targeting the port city.
The Israeli offensive was causing political waves in Lebanon, with some anti-Syrian politicians accusing Hezbollah of dragging the country into a costly confrontation with Israel.
"Hezbollah is playing a dangerous game that exceeds the border of Lebanon," Druse leader Walid Jumblatt said in comments published Friday.
Jumblatt, a leading anti-Syrian figure, also denounced the Israeli attacks on Lebanon, calling them completely unjustified.
The Associated Press contributed to this report.