Violence escalated at Lebanon's border with Israel on Sunday as Hezbollah launched explosive drones and powerful missiles at Israeli positions and Israeli air strikes rocked several towns and villages in south Lebanon.

Israel and the Iran-backed Hezbollah have been trading fire since the war in Gaza erupted two months ago, in their worst hostilities since a 2006 conflict. The violence has largely been contained to the border area.

An Israeli air strike on the town of Aitaroun destroyed five homes and damaged many more, Ali Hijazi, a local official, said. "Divine intervention prevented anyone being martyred. Three women and two men were wounded," he told Reuters.

The Israeli army did not immediately respond to a request for comment.

Senior Hezbollah politician Hassan Fadlallah, in a statement to Reuters, said Israeli air strikes were a "new escalation" to which the group was responding with new types of attacks, be it "in the nature of the weapons (used) or the targeted sites".

The Israeli army earlier said "suspicious aerial targets" had crossed from Lebanon and two were intercepted. Two Israeli soldiers were moderately wounded and a number of others lightly injured from shrapnel and smoke inhalation, it said.

Israeli fighter jets carried out "an extensive series of strikes on Hezbollah terror targets in Lebanese territory", it said. Sirens sounded in Israel at several locations at the border.

In Beirut, residents saw what appeared to be two warplanes streaking across a clear blue sky, leaving vapour trails behind them.

Hezbollah statements say its attacks aim to support Palestinians in the Gaza Strip.

Israeli Prime Minister Benjamin Netanyahu has warned that Beirut would be turned "into Gaza" if Hezbollah started an all-out war.

UNIFIL, the U.N. peacekeeping force in south Lebanon, said in a statement "the potential for a miscalculation that could trigger a wider conflict is increasing".

In one of several attacks announced by Hezbollah on Sunday, the group said it had launched the explosive drones at an Israeli command position near Ya'ara. In another, Hezbollah said it had fired Burkan (Volcano) missiles, which carry hundreds of kilograms of explosives.

Israeli air strikes were also reported on the outskirts of the Lebanese village of Yaroun, not far from the location of another of the Israeli positions Hezbollah said it had targeted on Sunday.

Those air strikes broke windows of houses, shops and a school in the nearby village of Rmeich, Toni Elias, a priest in Rmeich, told Reuters by phone.

U.N. WATCHTOWER STRUCK

Violence at the border has killed more than 120 people in Lebanon, including 85 Hezbollah fighters and 16 civilians. In Israel, the hostilities have killed seven soldiers and four civilians.

UNIFIL said shelling had damaged a watchtower at one of its positions on Saturday afternoon. Nobody had been injured and the source of the fire was under investigation, it said.

The Israeli army said Hezbollah had on Saturday night launched several rockets at Israel, and that one of them was "launched from 20 meters away from a United Nations compound in southern Lebanon".

By continuing to fire at Israel from areas "located only a few meters away from a U.N. compound", Hezbollah "endangers the lives of UNIFIL soldiers", the Israeli army said.

There was no immediate Hezbollah response to the Israeli statement.

UNIFIL said targeting of its positions "and any use of the vicinity of our positions to launch attacks" is unacceptable.