 Israel had hit Khiam a number of times earlier on Tuesday
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Four United Nations peacekeepers have been killed in an Israeli air strike on an observation post in south Lebanon.
UN Secretary General Kofi Annan said he was "shocked" at the "apparently deliberate targeting" of the post. Israel has expressed "deep regret".
Hezbollah's leader, Hassan Nasrallah, has vowed the group will continue its rocket attacks on Israel.
Israel earlier said it would control an area in southern Lebanon until international forces deployed.
The force will be discussed at crisis talks to be held in Rome on Wednesday.
Observers sheltering
US Secretary of State Condoleezza Rice will be at the talks after ending her tour of the Middle East on Tuesday.
More than 380 Lebanese and 42 Israelis have died in nearly two weeks of conflict in Lebanon, which began after Hezbollah captured two Israeli soldiers in a cross-border raid on 12 July.
The UN in Lebanon says the Israeli air force destroyed the observer post, in which four military observers were sheltering.
In pictures
It said the four, from Austria, Canada, China and Finland, had taken shelter in a bunker under the post after it was earlier shelled 14 times by Israeli artillery.
A rescue team was also shelled as it tried to clear the rubble.
"I am shocked and deeply distressed by the apparently deliberate targeting by Israeli Defence Forces of a UN Observer post in southern Lebanon," Mr Annan said in a statement from Rome.
Unifil has been operational in the border area since 1978 and is currently 2,000 strong.
Mr Nasrullah told Hezbollah's al-Manar television that the militant group would fire rockets deeper into Israel and would counter any Israeli advance into southern Lebanon, and criticised what he called an Israeli-US plan for a "new Middle East".
"There is no way that we can accept any humiliating conditions on us, our people or our country... especially after all these sacrifices... we are open to political discussions and solutions with flexibility, but the dignity and national interest is a red line."
In other military action:
- The Israeli army said it had killed a senior Hezbollah commander, Abu Jaafar, in fighting in southern Lebanon
- Earlier the UN said Israeli forces were now in control of the town of Bint Jbeil after fierce fighting and were moving on the village of Yaroun to the south
- Israel resumed air raids on Beirut, with explosions heard in southern suburbs - a Hezbollah stronghold
- Hezbollah fired more Katyusha rockets into Israel, killing a 15-year-old Arab-Israeli girl in the northern Israeli village of Maghar and striking Haifa with a large salvo
- Hezbollah said 27 of its fighters had been killed as of Monday, but the Israeli military said it had killed "some dozens".
Truce call
Earlier, Israeli Defence Minister Amir Peretz had said a "security zone" in southern Lebanon would be maintained "under the control of our forces if there is not a multinational force".
He said: "We have no other option. We have to build a new security strip that will be a cover for our forces."
He did not specify whether Israeli troops would remain there but insisted they would "continue to control [Hezbollah]" in their operations.
Israeli government sources have estimated the width of the zone at anything from three to 10km (1.9-6.2 miles).
An unnamed Israeli official quoted by Reuters news agency said between 10,000 and 20,000 international peacekeepers would be needed.
BBC defence and security correspondent Rob Watson says Israeli details on the zone - and how it will be secured - are far from clear.
Israel is acting with tremendous restraint, were they targeting civilian populations there would be thousands upon thousands dead 
He says it is possible Mr Peretz is trying to put pressure on the international community to deliver the peacekeeping force.
Earlier, Ms Rice met Israeli PM Ehud Olmert and later Palestinian President Mahmoud Abbas.
Mr Abbas called for an immediate end to "aggression against the Gaza Strip and the West Bank" and for an "immediate ceasefire" in Lebanon.
Ms Rice said the only solution was a sustainable and enduring peace.
Her words were reinforced later by US President George W Bush who said: "I support a sustainable ceasefire that will bring about an end to violence... Our mission and our goal is to have a lasting peace, not a temporary peace."
In his meeting with Ms Rice, Mr Olmert said he was "very conscious" of the humanitarian needs of Lebanon's civilians, but insisted Israel was defending itself against terrorism.
Ms Rice highlighted the need for Israel to consider the humanitarian needs of both Lebanon and the Palestinian people and the need for a durable peace.
She said: "It is time for a new Middle East, it is time to say to those who do not want a different kind of Middle East that we will prevail; they will not."