U.S. & World

BEIRUT, Lebanon (CBS News) ― Four Israeli sailors were lost at sea after Hezbollah attacked an Israeli warship off the Lebanese coast, the army said Saturday, in a new setback for the military in its offensive against the Shiite Muslim guerrilla group.

During the same attack, a civilian merchant ship was hit by a Hezbollah rocket, the army said. It gave no details on the nationality of the vessel or whether there were any casualties.

Israel launched its offensive after Hezbollah guerrillas crossed the Israel-Lebanon border on Wednesday and captured two Israeli soldiers. Israel has bombarded Lebanon's airport and main roads in the most intensive offensive against the country in 24 years, while Hezbollah has launched hundreds of rockets into Israel.

The intense fighting has sent shock waves through a region already traumatized by Israel's battle against Hamas militants in the Gaza Strip. With Israeli officials pointing fingers at Hezbollah's close allies, Syria and Iran, the crisis could soon spread even further.

The damaged Israeli warship, which had been carrying several dozen sailors, was towed back to the Israeli port of Haifa early Saturday after being set on fire and suffering heavy damage. The army confirmed reports that four sailors were missing and said a search was underway.

The army said the source of the attack was still under investigation. But military officials, speaking on condition of anonymity because the probe was at its early stages, said the ship had been struck by an unmanned drone rigged with explosives.

That would indicate that Hezbollah has added a new weapon to its standard arsenal of rockets and mortars, and could draw Iran even closer to the conflict.

The Israeli army said the warship suffered severe damage and was on fire hours later as it headed home. There were no details on the ship's crew, though Al-Jazeera TV said the Israeli military was searching for four missing sailors.

"You wanted an open war and we are ready for an open war," Hezbollah leader Sheik Hassan Nasrallah said in a taped statement. He vowed to strike even deeper into Israel with rockets.

Nasrallah's supporters watched the speech in a school where they took shelter from the bombing and they were delighted with his calls to arms, reports CBS News correspondent Elizabeth Palmer from Beirut.

Israel again bombarded Lebanon's airport and main roads in the most intensive offensive against the country in 24 years. For the first time it struck the crowded Shiite neighborhood of south Beirut around Hezbollah's headquarters, toppling overpasses and sheering facades off apartment buildings. Concrete from balconies smashed into parked cars, and car alarms set off by the blasts blared for hours.

The audiotape came shortly after Israeli missiles struck Hezbollah headquarters and Nasrallah's house in southern Beirut. His comments, however, apparently were prerecorded, and Nasrallah did not refer to the missile attack on his offices and residence.

Also, four rockets hit downtown Nahariya in Israel, leaving the area covered in shattered glass and shrapnel, reports CBS News chief foreign correspondent Lara Logan from Haifa. More than 300 short-range rockets have rained down on 20 Israeli towns since Hezbollah fighters first carried out their cross-border raid.

One rocket hit a home in Meron, killing a woman and her grandson. Some 220,000 people in northern towns hunkered down in bomb shelters.

•  An Israeli airstrike hit the offices of the Palestinian economy ministry early Saturday, setting the building on fire, Palestinian officials said. There were no immediate reports of casualties. Rescue teams rushed to the scene of the attack, located near a housing complex inhabited by some 600 people.The army said it had targeted the Palestinian economy ministry, which is controlled by the Hamas-led government.

•  Surging oil prices caused by Middle East violence pulled stocks sharply lower for a third straight session Friday, with bland earnings at General Electric Co. and weak consumer data further dampening the economic outlook. The Dow Jones industrial average shed 396 points in the past three days. Crude futures reached an intraday record of $78.40 a barrel and eventually settled at $77.03 a barrel, up 33 cents, on the New York Mercantile Exchange.

•  The U.S. State Department is making plans to evacuate diplomats in Beirut, but as for the 25,000 American citizens, so far nothing, Elizabeth Palmer reports. The situation is being monitored, but they are very worried and hoping that somebody will come up with a solution to get the people out.

•  Israel's deputy prime minister, Shimon Peres, told Lara Logan that Israel will only stop their campaign if three conditions are met: Hezbollah must be forced to withdraw all its forces from south Lebanon, they must destroy all of their weapons and the captured Israeli soldiers must be returned to Israel unharmed.

•  Former U.S. ambassador to Israel Martin Indyk spoke to CBS Evening News anchor Bob Schieffer about the U.S.'s role in this conflict, saying, "I'm afraid until Hezbollah decides that it's not worth it for them to continue or until the Lebanese people and Lebanese government say to Hezbollah, 'Listen, this is not our war and we're paying much too high a price for this,' it's going to be very hard for the United States to use the one card that it has, which is its ability to influence Israel."

Nasrallah was not hurt after the Israeli missiles demolished his headquarters among two buildings in Beirut's southern neighborhoods, the militant group said. Three people died in the airstrikes.

The attack on the warship was apparently timed to coincide with Nasrallah's message on the militant group's television station. "The surprises that I have promised you will start now. Now in the middle of the sea, facing Beirut, the Israeli warship ... look at it burning," Nasrallah boasted.

Israeli military officials said the drone apparently was developed by Hezbollah. The Lebanese guerrilla group has managed to fly unmanned spy drones over northern Israel at least twice in recent years.

Israel's campaign appeared to have a two-pronged goal. One was to batter Hezbollah and end its near control of the south on Israel's borders.

"We know it's going to be a long and continuous campaign and operation, but it's very clear. We need to put Hezbollah out of business," Brig. Gen. Ido Nehushtan told The Associated Press.

Israel's army chief, Lt. Gen. Dan Halutz, said Hezbollah has rockets that can reach as far as 43.5 miles or more, which would bring more Israeli cities, such as Hadera, within range.

The other goal was to seal off Lebanon by repeatedly striking its airport and main roads, including the coastal highway from north to south and the Beirut-Damascus highway, Lebanon's main land link to the outside world. At the same time, Israel was gradually escalating the damage to the country's infrastructure, painstakingly rebuilt since the civil war ended in 1990.

Israel holds Lebanon responsible for the capture of its two soldiers in a surprise Hezbollah raid; the Lebanese government insists it had nothing to do with the attack. However, Israel wants it to rein in the guerrillas, a move Lebanon has long resisted.

The level of damage inflicted by Israel appeared finely calibrated. For example, a missile punched a hole in a major suspension bridge on the Beirut-Damascus road but did not destroy it, unlike less expensive bridges on the road that were brought down. An Israeli strike hit fuel depots at one of Beirut's two power stations, sending massive fireballs and smoke into the sky, but avoided the station itself.

Throughout the morning, Israeli fighter-bombers pounded runways at Beirut's airport for a second day, apparently trying to ensure its closure after the Lebanese national carrier, Middle East Airlines, managed to evacuate its last five planes to Jordan. One bomb hit close to the terminal building.

Civilian casualties were mounting faster than during Israel's last major offensive in Lebanon, in 1996, an assault also sparked by Hezbollah attacks. In that campaign, 165 people were killed over 17 days, including 100 in the shelling of a U.N. base.

(© 2006 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)