The UN secretary-general urged Israel and Hezbollah to stop the violence and "prevent further loss of innocent life and the infliction of further suffering".
He condemned Hezbollah for its actions that "hold an entire nation hostage" and called Israel's response "excessive".
But Israel's UN ambassador, Dan Gillerman, told reporters after Annan's speech that there would be no ceasefire.
"We will do whatever is necessary," he said. "We have no timeline. The first thing that must be addressed is cessation of terror before we even talk about cessation of hostilities."
Annan also urged the UN Security Council to take "firm action" to ensure peace and stability in the region.
The UN secretary-general met the 15-member council on Thursday to discuss how to bring a quick end to the fighting, which began when two Israeli soldiers were captured by Hezbollah fighters in a cross-border raid last month.
Security Council nations Russia and France - along with the European Union - have also demanded a truce.
"We are calling, as a first step, for the immediate declaration of a ceasefire," Sergei Lavrov, Russia's foreign minister, told Kommersant newspaper on Thursday.
Russia criticised Israel's actions saying they went "far beyond the bounds of an anti-terrorist operation".
France has been circulating proposals at the UN aimed at forging a binding resolution on the conflict.
"We think a truce is needed for humanitarian reasons," Jean-Marc de La Sabliere, the French ambassador and council president for July, said.
France also said that it saw the key to resolving the conflict being Security Council resolution 1559, which calls for Hezbollah to be disbanded and disarmed and the Lebanese government to take control of its territory.
Annan called for an international conference to develop "precise timelines" for implementation of the resolution and other measures.
The United States has blamed Hezbollah for the violence and opposed calls for the Security Council to push for a halt to the fighting.
Condoleezza Rice, the US secretary of state, intends to travel to the Middle East next week to try to find a political solution to the situation, her spokesman said on Thursday.
The US says it is pushing for a long-term solution that would disarm Lebanon's Hezbollah fighters.
The European Union has pledged 10 million euros ($12.6 million) to help civilian victims of the violence.
Matti Vanhanen, the prime minister of Finland which holds the rotating EU presidency, urged Israeli troops and Hezbollah guerillas to stop the violence.
Annan criticised Hezbollah and
Israel over the violence
"The EU stands ready to help. A strong international presence in southern Lebanon, approved by the Security Council, may be needed," Vanhanen said. "However, all parties to the conflict must first commit to a ceasefire."
Israeli troops met fierce resistance when they crossed into Lebanon on Thursday to destroy Hezbollah positions and search for weapons.
An Aljazeera correspondent said four Israeli soldiers had been killed and three wounded in the fighting. Israeli media reported eight soldiers had been wounded.
An Israeli military source said one Hezbollah fighter had died.
The source said the firefight took place near the northern Israeli village of Avivim, near the place where Hezbollah fighters killed two soldiers and wounded nine on Wednesday.
Earlier on Thursday three soldiers were wounded, two seriously, in clashes in the area. The army said two Hezbollah fighters were killed in that clash.
Israel's army chief said the offensive would not end until Israel's security was restored and pledged to destroy Hezbollah's arsenal and military capabilities.
"The fighting in the north ... could last much longer, Lieutenant General Dan Halutz, the army's chief of staff, said in a letter to soldiers and officers.
More than 300 people have been killed by Israeli air strikes in Lebanon over the past nine days, while Hezbollah rockets have caused the death of 15 civilians in northern Israel.
The number of Katyusha rockets fired into northern Israel from Lebanon on Thursday was fewer than in previous days, police said.
Twenty-six rockets have landed on Israeli territory - four times fewer than the average of previous days.
Anwar Ibrahim, the former Malaysian deputy prime minister turned democracy campaigner, said Israel's bombardment of Lebanon could enrage moderate Muslims across the world and encourage extremism.
Anwar said anger was spreading among Muslims, including moderates and supporters of Israel's right to exist.
"It is not only confined to the Middle East. You can sense the rage throughout the world," Anwar told reporters in Canberra.
He said it was important for Muslim leaders and Western nations to take a strong stand on the current crisis and to be unbiased with their criticism.