But the Israeli-Lebanese border was calm, and Israeli officials played down the threat of a new war with the powerful Iran-backed Shiite group's militia.
In an unusual declaration, Israeli Defence Minister Moshe Yaalon said Hezbollah had passed on a message through the UN peacekeeping mission in southern Lebanon saying it did not want a further escalation.
"We have received a message... that, from their point of view, the incident is over," he told public radio.
Analysts say neither side seems keen for a repeat of the devastating Israel-Hezbollah conflict in 2006 and that any response is likely to be limited.
The two soldiers were killed when Hezbollah fired anti-tank missiles at a convoy in an Israeli-occupied area on the border with Lebanon.
Israeli forces responded to the attack -- which came in retaliation for an Israeli strike on the Golan Heights that killed senior Hezbollah members -- with artillery, tank and air fire on several villages in southern Lebanon.
There were no reports of Lebanese casualties, but a 36-year-old Spanish peacekeeper with UNIFIL was killed in the exchange of fire.
In Israel, farmers were tending apple orchards close to the border fence, an AFP photographer said. Schools had reopened, as had the Mount Hermon ski resort in the Israeli-occupied portion of the Golan Heights.
In the Lebanese border village of Majidiya, residents were collecting spent artillery shells from Wednesday's strikes, an AFP photographer said.
At the local UN base a blackened concrete tower could be seen with part of its wall blown out, and a Spanish flag was flying at half-mast.
Hundreds of mourners gathered at the Mount Herzl military cemetery in Jerusalem for the burial of one of the soldiers killed, 25-year-old Captain Yochai Kalangel.
Sobbing relatives greeted mourners, many wearing the purple beret of Kalangel's Givati (Highland) Brigade.
The other soldier, 20-year-old Staff Sergeant Dor Chaim Nini, was to be buried later in the town of Shtulim in south-central Israel.
Questions have been raised in Israel about why they were travelling in unarmoured vehicles in the volatile area.
Israel said it considered Wednesday's attack the "most severe" it had faced since 2006, when the war with Hezbollah killed more than 1,200 people in Lebanon, mostly civilians, and some 160 Israelis, mostly soldiers.
Prime Minister Benjamin Netanyahu blamed the attack on Iran. "It is Iran that is responsible for yesterday's attack," he said at a memorial ceremony in southern Israel for late prime minister Ariel Sharon.
"This is the same Iran that is now trying to achieve an agreement, via the major powers, that would leave it with the ability to develop nuclear weapons, and we strongly oppose this agreement," he said.
Israel has threatened military action to stop arch-foe Iran obtaining atomic weapons. Tehran insists its programme is only for civilian purposes.
Netanyahu held talks with top security brass late Wednesday, warning afterwards: "Those behind today's attack will pay the full price."
Still, analysts said Israel, fresh from a summer war with Hamas in the Gaza Strip and heading for a general election in March, was not eager for a full-scale conflict with Hezbollah.
"Hezbollah has 100,000 rockets, compared with the 10,000 of Hamas," said analyst Boaz Ganor of the Herzliya Interdisciplinary Centre.
"The human cost of such a war would be enormous, and no Israeli leader will be pro-active in this direction," he said.
As for Hezbollah, it is deeply involved in Syria's civil war, fighting with President Bashar al-Assad's forces against mostly Sunni rebels.
"The chances (of an escalation) are very slim, almost none, because none of the sides has an interest in moving to a big operation or a small war," Yaakov Amidror, a former major general and security advisor of Israel, told AFP.
"Hezbollah is very busy in Syria; the last thing that it needs is a second front," he said.
Tension in the area had been building before Wednesday's attack, especially after an Israeli air strike on the Syrian sector of the Golan Heights killed six Hezbollah fighters and an Iranian general on January 18.
Hezbollah leader Hassan Nasrallah had earlier threatened to retaliate against Israel for its repeated strikes on targets in Syria and boasted that the Shiite militant movement was stronger than ever.
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