There were conflicting reports about the number of casualties and the Israeli army said eight soldiers had been killed and 22 wounded in clashes around the town of Bint Jbeil on Wednesday.
Hezbollah's Al-Manar TV said "violent confrontations" erupted between its fighters and Israeli forces attempting to advance from a hilltop towards a hospital in the town.
The clashes came as more than 125 rockets were fired at northern Israel by Hezbollah during Wednesday, wounding dozens, Israeli security and medical sources said.
One rocket landed near a car in Haifa, seriously wounding a driver, medics said.
Rockets also landed in the towns of Acre, Carmiel and Safed.
Israeli commanders and UN peacekeepers had said on Tuesday that Bint Jbeil - 4km inside Lebanon - had been captured.
But Hassan Nasrallah, the Hezbollah leader, said in a television broadcast on Wednesday that the town - home to 4,000 people - was not in Israeli hands.
"They do not control Bint Jbeil. All the city of Bint Jbeil is still in the hands of the resistance," he said.
The Israeli army estimates that it has killed up to 30 fighters in the battle for what Israel considers a Hezbollah stronghold.
Until the latest fighting, nine Israeli troops had been killed in fighting inside southern Lebanon.