Israeli units early on Thursday pushed seven kilometres into Lebanese territory reaching the suburbs of Khiam, Lebanese police said.
"The Israeli forces are now 500 metres from the western and southern entrances to Khiam," a police officer told AFP.
An Israeli armoured column backed by artillery left from the northern town of Metulla and avoided Bourj al Muluk and Qlaya heading instead for Khiam, a town in the east of south Lebanon, where Hezbollah fighters are entrenched, the police said.
The Muslim guerrillas fired anti-tank rockets at the Israeli armour, the police said, as Israeli warplanes bombarded Khiam.
The advance on Khiam started shortly before midnight after a thousand shells fell on the town on Wednesday evening.
Israel's privately run Channel 10 television earlier said ground troops backed by armoured cars moved into south Lebanon late on Wednesday from Metulla, at the northern point of Upper Galilee in Israel's northeastern panhandle.
An Israeli military spokesman told AFP the advance did not mark the major extension of ground operations decided on by the security cabinet after a six-hour meeting earlier.
"Our forces are currently carrying out a limited operation against Hezbollah positions in Khiam from which they fired more than 60 Katyusha rockets against the town of Kiryat Shmona and the panhandle," the spokesman said.
"This is not the major offensive authorised today by the security cabinet."