Sheikh Hassan Nasrallah appeared in an interview on al-Jazeera television on Thursday evening, a day after Israel said it had bombed a bunker in the south of Beirut where the Hezbollah chief might have been hiding.

He said the two soldiers captured in a cross-border raid nine days ago would not be released without a prisoner swap, to be negotiated indirectly.

Israeli soldiers are fighting militants at two places inside Lebanon's border, Israeli officials say.

Israel is also continuing air strikes, while Hezbollah fighters have been firing more rockets into northern Israel.

The Israeli army has confirmed that two of its soldiers were killed in fighting with Hezbollah inside Lebanon.

The nine-day offensive has killed at least 306 people and displaced an estimated 500,000 in Lebanon.

The fighting has left 31 Israelis dead, including 15 civilians killed by rockets fired by Hezbollah into Israel.

In other developments:

• As many as 10,000 people have been evacuated from Lebanon on Thursday, with many nations sending both military ships and chartered vessels to remove their citizens

   

• Mr Annan is due to hold a private meeting with US Secretary of State Condoleezza Rice and EU foreign policy chief Javier Solana

   

• Ms Rice will travel to the Middle East "as early as next week" to press for a solution to the crisis, her spokesman said.

'Time of need'

Mr Annan's call for a ceasefire followed a similar demand by the EU, which pledged 10m euros (£6.8m) in aid.

Mr Annan said the humanitarian task was "massive" and needed urgent funding, and he hoped to issue a UN flash appeal as early as next week.

In the absence of a ceasefire, it was "imperative" to establish safe aid corridors in Lebanon, Mr Annan said.

Israeli Prime Minister Ehud Olmert has decided to open a humanitarian corridor between Lebanon and Cyprus, following a meeting with senior ministers, Israeli officials said later.

"We are not going to desert the people of Lebanon in their time of need, but we have to proceed with caution," Mr Annan told the Security Council at a briefing on the situation.

He acknowledged the UN mission that had just returned from the region had concluded there were serious obstacles to achieving a ceasefire.

He was fiercely critical of Israel and Hezbollah.

"Israel states that it has no quarrel with the government or people of Lebanon, and that it is taking extreme precautions to avoid harm to them," Mr Annan said.

"Yet a number of its actions have hurt and killed Lebanese civilians and military personnel and caused great damage to infrastructure.

"While Hezbollah's actions are deplorable, and as I've said, Israel has a right to defend itself, the excessive use of force is to be condemned."

He demanded Hezbollah release the captured soldiers immediately.

While Israel's actions were doing "little or nothing" to decrease popular support for Hezbollah in Lebanon or the region, they were doing a "great deal" to weaken the government of Lebanon, he said.

On the worsening situation for civilians in Lebanon, Mr Annan said most non-essential UN staff had been removed from the country, but that humanitarian experts were being brought in.

However the lack of access to many parts of southern Lebanon made it difficult to determine the number of people in need, he said.

'Cessation of terror'

The US ambassador to the UN, John Bolton, said it was time for the Security Council to start considering a response, and the US did seek a long-term end to hostilities.

But he added: "Still no-one has explained how you conduct a ceasefire with a group of terrorists".

Israel's UN ambassador Dan Gillerman said he was disturbed that Mr Annan's report had not mentioned the word "terror".

"The first thing that must be addressed is cessation of terror before we even talk about cessation of hostilities," he said.