The ceasefire began shortly after midnight on Sunday and comes after Israel provoked international outrage when its air force bombed a building in the village of Qana in southern Lebanon, killing at least 50 civilians, most of them children.
"Israel has agreed to a 48-hour suspension of aerial activity in south Lebanon to investigate today's tragic incident in Qana," said Adam Ereli, a US state department spokesman in Jerusalem.
Israel's ground offensives against Hezbollah positions in southern Lebanon are to continue despite the halt to bombing raids, and Ereli said that Israel retained the right to "take action against targets preparing attacks against it".
Israel will also coordinate with the United Nations to allow a 24-hour window for residents of southern Lebanon to leave the area if they wish, Ereli said.
The announcement came after Rice held extended meetings with Israeli Prime Minister Ehud Olmert and Foreign Minister Tzipi Livni in Jerusalem.
Israel's move followed the cancellation of a visit by Rice to Beirut on Sunday after the Lebanese government said it could not hold negotiations until there was an immediate ceasefire.
The United Nations Security Council said in a statement that it "strongly deplores" the attack on Qana, but stopped short of calling for an immediate end to the fighting.
"The Security Council expresses its concern at the threat of escalation of violence with further grave consequences for the humanitarian situation," said the statement issued on Sunday.
The air raid on the southern village of Qana on Sunday - the bloodiest single attack in Israel's 19-day-old offensive against Hezbollah - aborted Rice's plans to travel to Beirut after the Lebanese government told her she would not be welcome.
Israel's UN ambassador Dan Gillerman told the Security Council that Qana was "a hub for Hezbollah" and said Israel had urged villagers to leave.
But Lebanon said Israeli air strikes on roads and vehicles made it impossible for people in the south to flee.
Relations between Israel and Lebanon are often tense
Arab and Islamic leaders condemned the attacks and in Beirut protesters smashed their way into the United Nations headquarters as thousands massed outside chanting "Death to Israel, Death to America".
Gunmen also stormed and looted the UN compound in Gaza City during a protest over the Qana bombing. At least two people were wounded.
The small village of Qana first came to the world's attention in 1996 when Israel shelled a UN compound in the village during its 'Grapes of Wrath' operation, killing 106 Lebanese civilians who were sheltering there.
Despite the 24-hour halt to Israel's air campaign, fighting on the ground has continued as Israeli forces press ahead with their plan to create a 'security zone' inside Lebanon along the Israeli border.
"By Wednesday we are going to establish a 2km-wide 'security zone' in which there will be no infrastructure or sign of Hezbollah's presence," army operations chief General Gadi Eisenkaut told reporters.
Israel has mobilised thousands of army reservists but has ruled out another occupation of its northern neighbour.
Lebanese Prime Minister Fuad Siniora meanwhile denounced the Qana carnage as a "war crime" and thanked Hezbollah.
"I thank (Hezbollah leader) Sayyed Hassan Nasrallah for his efforts and I thank all those who are sacrificing their lives for Lebanon's independence," he said.
Hezbollah fired 156 rockets at cities in northern Israel on Sunday, surpassing the previous record of 151 set on July 26, an army spokesman said.
Five people were wounded according to the army, though the Israeli equivalent of the Red Cross, Magen David Adom, reported 15 wounded.
Some 1,800 rockets have been fired at northern Israel since the latest conflict started on July 12. Eighteen civilians in Israel have been killed and some 300 wounded.