Six Israeli soldiers have been wounded after an anti-tank missile fired from Lebanon hit an IDF vehicle near the border, according to local reports.
A spokesperson for the UN force in Lebanon, UNIFIL, told AP and the Daily Star that a Spanish UN peacekeeper was also killed in the incident.
Lebanon's Shiite militant group Hezbollah claimed responsibility for the attack on the Israeli military convoy saying "heroic Quneitra martyrs" destroyed the vehicles and injured officers among "enemy ranks".
The group said the assault comes in retaliation for the killing of six of its members and an Iranian general by Israeli air forces in the Golan Heights, near Syria's Quneitra border crossing with Israel.
The Israeli army responded to the attack by shelling areas in south Lebanon. Lebanese security forces said the IDF fired at least 50 artillery shells into Lebanon, targeting the border villages of Majidyeh, Abbasiyeh and Kfar Chouba near the Shebaa Farms area.
One Lebanese officials told AP that the incident is believed to be a "sophisticated Hezbollah operation" targeting Israeli army vehicles along the border.
Authorities shut down roads in the northeast along borders with Lebanon and Syria after the attack, which took place near Mount Dov and Shebaa Farms, a disputed tract of land where the borders of Israel, Lebanon and Syria meet. Residents of the area were ordered to remain in their homes.
Israeli army chief is convening general officers for an emergency "assessment" of the situation on the border.
Israeli prime minister Benjamin Netanyahu confirmed that the IDF is responding to the incident. "The IDF stands ready to act forcefully on all fronts," he tweeted.
He added that anyone challenging the Israeli army on the northern border "look at what happened in Gaza". "Hamas suffered its worst blow since it was established," he said, referring to the Israeli offensive on Gaza last summer.
The attack came after Israeli aircraft struck Syrian army artillery positions in retaliation for rockets launched at the Israeli-occupied Golan Heights.