Sayyed Hassan Nasrallah made the remarks in a televised statement on Thursday released hours after Hezbollah launched over 100 rockets at northern Israel, killing seven people.
Nasrallah said: "If you strike Beirut, the Islamic resistance will strike Tel Aviv and it is able to do so."
A senior Israeli defence source said Israel would respond by attacking Lebanon's infrastructure if a strike on Tel Aviv took place.
Nasrallah also said that Hezbollah would end its rocket attacks against northern Israel if it stopped attacking civilian areas of Lebanon.
However Naim Kassem, Hezbollah's deputy leader, told Aljazeera that the group would not accept a ceasefire that did not include the withdrawal of all Israeli troops from Lebanese soil.
"An end of [Israeli] aggression means three things: firstly a ceasefire, secondly the return of those evicted, and third of all the departure of Israel from any land it might have occupied."
An Israeli warplane dropped leaflets on Beirut's Hezbollah-dominated southern suburb on Thursday, urging residents to leave the area because Israel planned to widen its offensive in Beirut.
"To the residents of Haret Hreik, Beer al-Abed, Hay Madi and Rweis, for your own safety you must flee those suburbs immediately," said the Arabic leaflets, signed "The State of Israel".
Hezbollah has fired hundreds of
rockets at northern Israel
The Israeli army has also received new orders from Amir Peretz, the Israeli defence minister, to take control of southern Lebanon from the border to the Litani river.
An Israeli push to the river would leave its forces in control of Lebanese territory about 30km wide and 30km deep.
About 10,000 Israeli troops have pushed into southern Lebanon in the ground offensive against Hezbollah.
Israel also continued its airstrikes, bombing the capital Beirut and killing at least four people in the south.
At least seven people were killed and many injured during a series of rocket attacks on northern Israel by Hezbollah fighters.
Over 100 rockets landed inside northern Israel within the space of one hour on Thursday afternoon, Israeli officials said.
In Maalot, three Israeli Arabs were killed when a rocket landed near their car. Three people were also killed during rocket attacks on the town of Acre. It was not clear where the seventh person died.
Three Israeli soldiers also died on Thursday during clashes with Hezbollah inside southern Lebanon.