Rockets were fired from Lebanon into Israel on Thursday and answered by a burst of cross-border artillery fire, officials said.
There were no immediate reports of any casualties.
The Israeli military said it had intercepted at least one rocket. Air raid sirens were heard across Israel's western Galilee region.
There was no claim of responsibility but three security sources said Palestinian factions in Lebanon, not Hezbollah, were believed to be responsible for the rocket fire.
Israeli Prime Minister Benjamin Netanyahu was "receiving continuous updates about the security situation and will conduct an assessment with the heads of the security establishment," his office said.
The rocket attack comes at a time of heightened tension following Israeli raids on the Al-Aqsa Mosque compound in Jerusalem this week.
Residents of southern Lebanon said they heard loud blasts.
In a written statement, the United Nations peacekeeping force in south Lebanon (UNIFIL) described the situation as "extremely serious" and urged restraint. It said UNIFIL chief Aroldo Lazaro was in contact with authorities on both sides.
Israeli broadcasters showed large plumes of smoke rising above the northern town of Shlomi and public sector broadcaster Kan said the Israel Airports Authority closed northern air space, including over Haifa, to civilian flights.
