At least three rockets have been fired into northern Israel from Lebanon, raising fears the Israeli offensive against militants in Gaza may spread.
Israel replied with artillery, but called the attack an "isolated event".
The incident followed Israel's heaviest bombardment so far on Gaza, with 60 air strikes targeting Hamas facilities.
Efforts have continued to broker a ceasefire, as a senior Israeli official travelled to Cairo to hear details of a plan put forward by Egypt and France.
A Hamas delegation is expected in the Egyptian capital at some stage for parallel "technical" talks, Egyptian diplomats said.
Correspondents say this is a dangerous moment in the current conflict.
The rocket attacks from Lebanon have raised concerns about a wider war in the region, says the BBC's Middle East Editor Jeremy Bowen.
But the Lebanese government was swift to condemn the attack, and speculation that militant group Hezbollah was behind the attacks was played down in Israel.
Schools closed
At least three Katyusha rockets were fired from southern Lebanon into the northern Israeli area of Nahariya early on Thursday.
One of the rockets hit a nursing home were some 25 elderly residents were eating breakfast in a nearby dining hall, the Jerusalem Post reports.
At least two people were slightly wounded and a number of others were suffering from shock, Israeli officials said.
Israel immediately responded with five artillery shells into Lebanon, calling it a "pinpoint response at the source of fire".
Shortly afterwards, reports came in of a further rocket attack from Lebanon, although the army later called this a false alarm.
Lebanese Prime Minister Fouad Siniora condemned the attack and called for the army and the UN to investigate.
Information Minister Tarek Mitri told the AFP news agency he had been "assured" by Hezbollah they were not involved in the rocket attacks.
Israeli cabinet minister Raif Eitan said he believed Palestinians in Lebanon, not Hezbollah, were behind the attack.
On Wednesday, Hezbollah leader Hassan Nasrallah spoke openly about the possibility of a renewed conflict with Israel, saying its fighters were on high alert along the Lebanese-Israeli border.
Northern Israel came under attack from rockets fired by Hezbollah during the brief war with Lebanon in the summer of 2006.
Air attacks
In Gaza, Israel continued its offensive overnight with 60 airstrikes targeting police sites, 10 Hamas tunnels, weapons storage facilities, launching pads "and a number of armed gunmen", the Israeli army said.
Naval and artillery units "continued to support the ground forces" with one soldier lightly wounded, the army added.
The bombardment followed a three-hour pause in fighting on Wednesday to allow vital humanitarian aid into Gaza.
Aid agencies report that Gazans rushed into the streets to buy essential supplies and visit relatives in hospital during the lull.
UN aid workers welcomed Israel's promise of brief daily ceasefires but said only a total end to fighting would allow them to distribute aid to those who need it.
About 700 Palestinian and 11 Israeli lives are said to have been lost since the offensive began 12 days ago.
Casualty claims in Gaza cannot be independently verified.
While the BBC has had Palestinian producers reporting from Gaza, Israel only allowed Western TV crews to enter on Wednesday, embedded with its army.
-BBC-
