Israel said it was ready for an escalation on the Lebanese border after an exchange of fire with Hezbollah but played down the prospects of all-out war.

"We believe that neither Hezbollah wants a full-out war, and we definitely do not wish to have a war," an Israeli army spokesman, Amnon Shefler, told journalists.

"We do not wish to escalate to a full war, yet of course we are very prepared for that and we will not allow these acts of terror to continue and we will do what is needed," he said following Hezbollah rocket fire into Israeli-occupied territory that prompted retaliatory shelling.