The inquiry, to be led by Amnon Lipkin Shahak, a former chief of staff, will examine the army's preparation and conduct during the war.

"[Amir] Peretz informed chief of staff Dan Halutz of the creation of the external inquiry panel," an official at the defence ministry said on Wednesday.

The Israeli army and government have come under heavy criticism for failing to defeat Hezbollah before a fragile UN-backed ceasefire took effect on Monday.

Halutz has also been criticised for selling shares hours before launching the offensive in Lebanon.

At least 842 people were killed in Lebanon during the 34-day campaign, most of them civilians.

The conflict also left 160 Israelis dead, including 41 civilians.