GAZA CITY, Gaza Strip (AP) - Sharply escalating its military campaign, Israel dropped a quarter-ton bomb on a Gaza home today in a failed attempt to assassinate top Hamas fugitives. Nine members of the same family were killed, including seven children.

Further heightening tensions, the Lebanese guerrilla group Hezbollah fired rockets at northern Israel and captured two Israeli soldiers during cross-border fighting.

Israel's Defense Ministry said it held Lebanon responsible for the soldiers' safety. Israeli aircraft struck roads, bridges and Hezbollah guerrilla positions in southern Lebanon, and heavy exchanges of fire along the border were reported.

The Israeli army said there were “casualties” among its troops, but declined to confirm Arab television reports that three soldiers were killed.

Prime Minister Ehud Olmert said Hezbollah would pay a “heavy price” for its actions. Israel's military, meanwhile, ordered residents of Israeli towns along the northern border to seek cover in underground bomb shelters.

Hezbollah's capture of Israeli soldiers opened a new front in Israel's battle against Islamic militants, and threatened to complicate its efforts to win the release of an Israeli soldier kidnapped two weeks ago by Hamas-allied militants in Gaza.

Hamas appeared to toughen its demands for the safe return of the soldier its militants seized, saying Hezbollah's actions strengthened Hamas' position.

“We have proven to this enemy (Israel) that the one option is the release of Palestinian, Lebanese and Arab captives. All captives, without exception,” said Osama Hamdan, Hamas' spokesman in Lebanon.

“What happened has strengthened the issue of the captives, and the enemy will submit to our choice, which is the exchange of the captives in return for the release of the soldiers,” he told Al-Jazeera television.

Hamas had previously demanded the release of some Palestinian prisoners in return for Cpl. Gilad Shalit's release.

Hamdan did not say whether Hamas had consulted with Hezbollah, but he said there may be subsequent “coordination and an understanding.”

Israel has been conducting a large-scale military offensive in Gaza, which borders southern Israel, since militants captured Shalit.

The nighttime aerial attack in Gaza was bound to intensify international criticism of Israel. The United Nations has already complained about what it said was disproportionate use of Israeli force in the Gaza operation.

The campaign's declared aim is to force Hamas militants to free an Israeli soldier kidnapped last month and halt their rocket fire on southern Israel.

The Israeli military said Mohammed Deif, the leader of the Hamas military wing and No. 1 on Israel's wanted list for more than a decade, was wounded in the 2:30 a.m. airstrike, but it didn't know how badly.

Israel blames Deif, a master bomb maker, for many suicide attacks against Israeli targets. The bombing raid was the army's fourth attempt to kill him; he lost an eye in a 2002 missile strike.

Hamas confirmed that Deif was targeted, but denied he was wounded.