The raid on the southern village of Qana was the bloodiest single attack during Israel's 19-day-old war on Hizbollah and rescuers said the death toll might rise.

Lebanese Prime Minister Fouad Siniora said he would hold no negotiations before a ceasefire and officials said they had told Rice to stay away from Beirut until the fighting stopped. Siniora denounced "Israeli war criminals". He demanded an immediate, unconditional ceasefire and an international investigation into "Israeli massacres".

The air strike, whose target was not immediately clear, occurred as Rice was in Jerusalem on a mission to persuade Israel and Lebanon to agree on an international force to deploy on the border.

Israeli Prime Minister Ehud Olmert said his country was "in no rush" for a ceasefire, and Israeli forces thrust across the border sparking new clashes with Hizbollah guerrillas.

A three-storey building in Qana where dozens of displaced civilians were sheltering and several other houses were destroyed in the dawn raid (local time), killing many people in their sleep.

A witness counted 40 bodies. Lebanese Red Cross officials in Beirut said rescuers had extracted 38 bodies from the devastated buildings, including 23 children, and seven wounded. At least 17 more bodies were feared to be still under the rubble, seven of them children.

Red Cross workers covered the corpse of one dead child with a blanket. A woman in a red-patterned dress lay crumpled and lifeless in the broken masonry. A leg poked out from the rubble nearby. Another child lay dead in the street.

Israel's military said it had warned residents of Qana to leave and that Hizbollah bore responsibility for using the village to fire rockets at the Jewish state.

Distraught people in Qana screamed in grief and anger amid wrecked buildings as others scrabbled at slabs of concrete with their hands to try to reach people buried in the debris.

Israeli warplanes struck Qana only hours after Hizbollah leader Sayyed Hassan Nasrallah threatened to rocket more cities in central Israel if attacks on Lebanon continued.

"There are many cities in central Israel which will come into target range ... if the barbaric aggression on our country and people continues," he said.

Lebanese television stations described the raid on Qana as a massacre. The village is already a potent symbol of Lebanese civilian deaths at the hands of Israel's military.

In April 1996, Israeli shelling killed more than 100 civilians sheltering at the base of UN peacekeepers in Qana during Israel's "Grapes of Wrath" bombing campaign.

At least 523 Lebanese, mostly civilians, and 51 Israelis have been killed in the conflict that erupted after Hizbollah captured two Israeli soldiers in a cross-border raid on July 12.

Olmert said at the start of a weekly cabinet meeting: "Israel is in no rush to reach a ceasefire before we get to that point where we could say that we reached the main objectives we had set forth. This includes the ripening of the diplomatic process and preparing the multinational force."

Confirming a major new incursion into Lebanon, the Israeli military said tanks and troops had rolled across the border at Metula, under cover of artillery fire and air strikes, to try to find and destroy Hizbollah rocket launchers.

An Israeli army spokeswoman said at least one soldier had been wounded in fighting, in which she said Hizbollah had also suffered casualties. Hizbollah reported fierce clashes.

Before Lebanon cancelled her visit, Rice had said she hoped for a deal on ceasefire terms to be outlined in a UN Security Council resolution that may be presented as early as Tuesday.

After meeting Olmert on Saturday evening, Rice held talks with Foreign Minister Tzipi Livni on Sunday. She had been expected to meet Siniora in Beirut later in the day.

Israel's Haaretz newspaper quoted defence sources as saying the army had orders to accelerate its offensive, assuming it had another seven to 10 days before it had to stop fighting.