BEIRUT (Reuters) - Fierce clashes raged in Beirut on Thursday after the Iranian-backed group Hezbollah said the U.S.-supported Lebanese government had declared war by targeting its military communications network.

Pro-government loyalists burn tyres and set up barricades on the main road to the border with Syria in the Masna'a area in eastern Lebanon May 8, 2008. REUTERS/ Khaled Hussein

Security sources said the fighting killed at least 10 people and wounded 20. The thud of exploding grenades and crackle of automatic gunfire echoed throughout the night in the worst internal strife since the 1975-90 civil war.

Governing coalition leader Saad al-Hariri proposed a deal to end the crisis under which the government decisions that infuriated Hezbollah would be considered a “misunderstanding.”

The decisions would then be referred to the Lebanese army, which has been neutral in the confrontations, giving army commander General Michel Suleiman the option to suspend their implementation.

But Hezbollah’s al-Manar TV later quoted an opposition source as rejecting any ideas for ending the conflict other than those proposed by Hezbollah leader Sayyed Hassan Nasrallah earlier on Thursday. Nasrallah had demanded measures taken by the government this week be rescinded.

The U.N. Security Council called for “calm and restraint,” urging all sides to return to peaceful dialogue. The White House urged Hezbollah to stop “disruptive” acts.

Fighters from the Shi’ite movements Hezbollah and Amal exchanged assault rifle fire and rocket-propelled grenades with pro-government gunmen, including fighters loyal to the Sunni Future movement, in several areas of the capital.

Security sources said Hezbollah gunmen overran at least five offices of Hariri’s Future group and police-guarded houses of pro-government officials. Many cars and shops were set on fire and scores of terrified civilians fled the hot spots.

Hezbollah launched a new campaign of street protests on Wednesday, piling pressure on the government after it declared Hezbollah’s communications network illegal and removed the head of airport security, a figure close to the group, from his post.

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Supporters of Hezbollah and its allies have blocked roads leading to the airport -- Lebanon’s only air link to the outside world -- and other main streets, paralyzing much of the capital.

The airport was barely functioning with only a few flights arriving and taking off, airport officials said.

“CUT THE HAND”

Fighting escalated minutes after Hezbollah chief Sayyed Hassan Nasrallah said the only way out of the crisis was for the government to rescind the decisions and attend talks to end the political conflict with the Hezbollah-led opposition.

“This decision is first of all a declaration of war and the launching of war by the government... against the resistance and its weapons for the benefit of America and Israel,” he said.

Nasrallah described the fixed-line network that connects the group’s officials, military commanders and positions as a vital part of the military structure of the group, which fought a 34-day war with Israel in 2006.

“I had said that we will cut the hand that targets the weapons of the resistance. ... Today is the day to fulfill this decision,” Nasrallah said via video link from an unknown location in Beirut’s southern suburbs.

Hezbollah supporters and pro-government loyalists had clashed earlier in the day in the Bekaa Valley in the east of the country, where five were wounded, security sources said.

The U.S. ambassador to the United Nations said the Security Council should consider “additional steps” including sanctions if Syria and Hezbollah did not take steps to resolve the crisis.

“Hezbollah needs to make a choice -- be a terrorist organization or be a political party, but quit trying to be both,” said a White House spokesman. “They need to start playing a constructive role and stop their disruptive activities now.”

“It’s double jeopardy: the cabinet can’t retreat or it is practically finished and can’t go through with it to the end because of the balance of power on the ground,” columnist Rafik Khouri wrote in the newspaper al-Anwar.

“And Hezbollah can’t step back from its position because it would be agreeing to getting its wings clipped and can’t go all the way because of the dangers sectarian strife poses for everyone.”

Hezbollah has led a political campaign against Prime Minister Fouad Siniora’s anti-Syrian cabinet. The crisis has paralyzed much of the government, left Lebanon with no president for five months, and already led to bouts of violence.

The group was the only Lebanese faction allowed to keep its weapons after the civil war, to fight Israeli forces occupying the south. Israel withdrew in 2000 and the fate of Hezbollah’s weapons is at the heart of the political crisis.