|The explosion hit peacekeepers from the Spanish|
contingent near the border town of Khiam [AFP]
A police source said a car bomb, "most likely" driven by a suicide bomber, caused the blast which hit two Unifil vehicles near the southern town of Khiam, bordering Israel.
"The Palestinian refugees are not being treated properly by Lebanon"
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It was the first deadly attack on Unifil since last year's Israel-Hezbollah war.
Unifil was created by the UN Security Council in 1978 to confirm Israeli withdrawal from Lebanon, restore international peace and security and assist the Lebanese government in restoring its effective authority in the area.
After the 2006 war, the UN beefed up Unifil to monitor adherence to the terms of resolution 1701, which brought about the ceasefire between Israel and Hezbollah.
Spain has 1,100 troops serving in the 13,000-strong Unifil force.
Witnesses said ammunition in a UN troop carrier had exploded after the initial blast.
There was no immediate claim for the attack.
Earlier, a Lebanese security source said that the peacekeepers were targeted by a remotely detonated roadside bomb.
Hezbollah, the Lebanese Shia opposition group, condemned the blast, saying on its al-Manar television channel: "The attack hurts the people of the south and of Lebanon."
Lebanese politicians condemned the bombing, which Saad al-Hariri, Sunni leader of the ruling coalition government, described as "a grave terrorist attack".
Fouad Siniora, the prime minister, called his Spanish counterpart to denounce the bombing. In Paris, Condoleezza Rice, the US secretary of state, joined the French foreign minister, Bernard Kouchner, in also condemning the attack.
Spanish peacekeepers are part of the
multinational UN force in Lebanon [EPA]
Sunday's attack came just hours after Lebanese troops killed seven Islamist fighters in a raid on a block of flats in the northern city of Tripoli and
as the Lebanese army continues to besiege fighters from Fatah al-Islam at a Palestinian refugee camp in north Lebanon.
The protracted army siege against Fatah al-Islam fighters at the refugee camp has not yet concluded.
Unifil was recently accused by Fatah al-Islam of bombing its positions at the Nahr al-Bared, near the city of Tripoli, on June 2.
Lebanese judicial sources said the fighters had threatened attacks on UN peacekeepers.
"During questioning, some members of Fatah al-Islam confessed that one of the main aims of their group was to carry out attacks on Unifil in southern Lebanon," one source said.
Unifil has denied any involvement in the Lebanese army siege of the Nahr al-Bared camp, saying it has no remit to operate in such a manner.
Source: Al Jazeera and agencies