By Jeffrey Heller and Sylvia Westall
JERUSALEM/BEIRUT (Reuters) - Two Israeli soldiers and a Spanish peacekeeper were killed on Wednesday in an exchange of fire between Hezbollah and Israel that has raised fears of a full-blown conflict between the militant Islamist group and the Jewish state.
In the biggest escalation since a 2006 war, the soldiers were killed when Hezbollah fired a missile at Israeli military vehicles on the frontier with Lebanon.
The peacekeeper, serving with a U.N. monitoring force in southern Lebanon, died after the attack as Israel responded with air strikes and artillery fire, a U.N. spokesman and Spanish officials said.
Hezbollah said one of its brigades in the area carried out the attack, which appeared to be in retaliation for a Jan. 18 Israeli air strike in southern Syria that killed several Hezbollah members as well as an Iranian general.
It came hours after Israeli jets bombed positions near the occupied Golan Heights, which Israel's military said was in response to rocket fire from Syria.
Tensions in the region, where the frontiers of Israel, Lebanon and Syria meet and militant groups opposed to Syrian President Bashar al-Assad are active, have been bubbling for months but have boiled over in the past 10 days.
The Israeli military confirmed the death of the soldiers. Hospital officials said a further seven had been wounded, although none had life-threatening injuries.
Andrea Tenenti, spokesman for the United Nations Interim Force in Lebanon (UNIFIL), said the peacekeeper's death was under investigation. UNIFIL has more than 10,000 peacekeepers.
The United Nations' special coordinator for Lebanon, Dutch diplomat Sigrid Kaag, called on all parties to refrain from any action that could further destabilize the situation.
The frontier has largely been quiet since 2006, when Hezbollah and Israel fought a 34-day war in which 120 people in Israel and more than 500 in Lebanon were killed.
Since the end of the war with Hamas militants in Gaza last year, Israel has warned of frictions on the northern border, including the possibility that Hezbollah might dig tunnels to infiltrate the Jewish state. In recent days it has moved more troops and military equipment into the area.
A retired Israeli army officer, Major-General Israel Ziv, said he believed Wednesday's assault was an attempt by Hezbollah to draw Israel more deeply into the war in Syria, where Hezbollah is fighting alongside forces loyal to President Assad.
"Israel needs to protect its interests but not take any unnecessary steps that may pull us into the conflict in Syria," he said.
Prime Minister Benjamin Netanyahu, who has made security his top priority ahead of a parliamentary election on March 17, said Israel was "prepared to act powerfully on all fronts", adding: "Security comes before everything else."
His office accused Iran of being behind what was described as a "criminal terror attack". Iran is a major funder of Hezbollah, a Shi'ite group headed by Hassan Nasrallah.
In a communique, Hezbollah described Wednesday's operation as "statement number one", indicating that a further response was possible. Nasrallah is expected to announce the group's formal reaction to Israel's Jan. 18 air strike on Friday.
In Beirut, celebratory gunfire rang out after the attack, while residents in the southern suburbs of the city, where Hezbollah is strong, packed their bags and prepared to evacuate neighborhoods that were heavily bombed by Israel in 2006.
In Gaza, Palestinian militant groups praised Hezbollah.
It remains to be seen whether Israel and Hezbollah will back away from further confrontation. With an Israeli election looming and Hezbollah deeply involved in support of Assad in Syria, there would appear to be little interest in a wider conflict for either side.
Regional analysts said they did not expect events to spiral.
"Netanyahu most likely realizes that a prolonged military engagement in Lebanon could cost him the election," said Ayham Kamel and Riccardo Fabiani of the Eurasia Group.
"Instead, Israel will pursue limited actions targeting Hezbollah in Lebanon, but the low scale tit-for-tat exchanges will not broaden into a wider war."
(Additional reporting by Maayan Lubell, Luke Baker and Ori Lewis in Jerusalem, Laila Bassam and Oliver Holmes in Beirut, Julien Toyer in Madrid and Suleiman Al-Khalidi in Amman; Editing by Robin Pomeroy)