The UN secretary general's special envoy, Terje Roed-Larsen, and the EU foreign policy chief, Javier Solana, arrived in Beirut to meet the Lebanese prime minister, Fouad Siniora, in the hope of securing an agreement to curb the violence.

Israel's prime minister, Ehud Olmert, warned of "far-reaching consequences" after eight civilian railway workers were killed and six seriously injured in a morning rocket strike in the city of Haifa, the deadliest strike in Israel since the conflict began last week. Some analysts now say a major ground invasion of southern Lebanon is being considered.

Last night Hizbullah rockets hit a village outside Nazareth, home to Israel's biggest Arab community, and the town of Afula. At 33 miles from the Lebanese border, they are the southernmost targets to have been struck so far.

Israeli jets hit army bases in Tripoli, Lebanon's second largest city, and Abdeh, killing at least nine Lebanese soldiers and injuring many more.

Earlier, at least 16 civilians were killed after a bomb flattened a building near the southern Lebanese town of Tyre. Five members of one family were killed in a strike in Aitaroun. All were visiting expatriate Lebanese who held Canadian citizenship. Around 140 Lebanese civilians have been killed so far. At least 12 Israeli civilians have died as well as 12 soldiers and sailors. Two Israeli soldiers are still being held captive by Hizbullah.

As the pressure mounted, leaders of the G8 meeting in St Petersburg blamed Hizbullah for the upsurge in violence and said the onus was on the militant group to free the two Israeli soldiers it kidnapped on Wednesday. They held back from demanding an immediate ceasefire by Israel but called on Israel to show the utmost restraint, seek to avoid civilian casualties and consider agreeing to a UN observer and security mission being set up on the Lebanese border.

"It is a strong message with a clear political content," said the German chancellor, Angela Merkel.

The leaders, struggling all day to reach agreement, said conditions for a sustainable cessation of violence must include the return of captured Israeli soldiers, an end to shelling of Israeli territory and an end to Israeli military operations, as well as the early withdrawal of its forces. In an attempt to reassure Israel that Hizbullah can be restrained on the Lebanese Israeli border, the G8 suggested the UN security council should consider "the possibility of an international security/monitoring presence" on the border.

Italy's prime minister, Romano Prodi, emerged as a mediator yesterday when Lebanon said he had passed on Israeli conditions for a ceasefire.

"Prodi told me that Israeli prime minister Ehud Olmert informed him of two demands for a ceasefire - handing over the two captive Israeli soldiers and a Hizbullah pullback to behind the Litani river," a government statement quoted Mr Siniora as telling the cabinet. The Litani is 12 miles north of the border with Israel.

Israeli jets were also in action in Gaza destroying the Palestinian foreign ministry building in northern Gaza.

The world's financial markets are anxiously seeking news of a deal to end the conflict amid fears that it could send oil prices above $80 a barrel. Last week the cost of crude hit a record high of more than $78 a barrel.

But in Israel there was no suggestion of a ceasefire. Mr Olmert, who met his cabinet yesterday, said: "Nothing will deter us, whatever far-reaching ramifications regarding our relations on the northern border and in the region there may be."

One senior Israeli general warned of an imminent escalation in attacks on southern Lebanon, where Hizbullah has its key rocket-launching sites. Hassan Nasrallah, the Shia cleric who leads Hizbullah and whose apartment and offices have been bombed by the Israelis, appeared on television last night threatening yet more violence.

"Any advances will be good news for the mujahideen," he said. "It will bring us near to victory and we will humiliate them as in the past."

From Tehran, which in effect set up Hizbullah in the early 1980s, came an insistence that the group would not disarm. Iran's supreme leader, Ayatollah Ali Khamenei, said: "The American president says Hizbullah should be disarmed. It is obvious that you [America] want that, and it is obvious that the Zionists [Israel] want that too. But it will not happen." It is believed the rocket that hit Haifa was an Iranian-made missile. A missile that struck an Israeli warship on Friday night, killing four sailors, is now thought to have also been an Iranian-made radar-guided missile.

"You will probably see ground forces into southern Lebanon for a brief time," Gerald Steinberg, of Israel's Bar-Ilan University, told Reuters. "With their [Hizbullah's] weapons storehouses being hit, when will the cost to them become too great to continue?"

Western countries stepped up plans to evacuate their citizens from Lebanon. France hired a Greek cruise ship to sail its citizens out. An advance US security team arrived in Beirut to plan for an evacuation of the 25,000 Lebanese-Americans still in the country. Britain is sending the aircraft carrier HMS Illustrious and assault ship HMS Bulwark.