"All the Lebanese territory is already the target of the Israeli bombardments ... but this threat is against Beirut, if you bombard our capital we will bombard the capital of your aggressive entity," he said in a televised speech, referring to Tel Aviv which Arabs consider as the capital of Israel rather than Jerusalem.

He was referring to threats to attack Beirut by Israeli Chief of Staff Dan Halutz.

Israeli public television promptly quoted a senior military official as saying late Thursday that the Jewish state will destroy all Lebanese infrastructure if Hezbollah carries out its threat to hit Tel Aviv.

Israel has vowed to establish a "security zone" in southern Lebanon, where a contingent of around 10,000 troops have entered in a bid to squeeze out Hezbollah fighters and halt rocket fire into Israel.

The Israeli army received orders from Defense Minister Amir Peretz to prepare for an eventual seizure of southern Lebanon up to the Litani River, which runs in various locations between five and 30 kilometers (three and 19 miles) from the Israeli border, Peretz's spokesman said Thursday.

"The Islamic resistance is capable of striking with the quantity and the depth that is required and at the time it is asked to do it," said Nasrallah who in his last address on July 29 vowed to strike at the centre of the Jewish state if more Lebanese civilians were killed.

Israel launched a massive offensive on Lebanon on July 12 after Hezbollah guerrillas captured two Israeli soldiers at the borders to force a prisoners' exchange. Israeli troops made several incursions in southern Lebanon where their advance has faced fierce Hezbollah resistance.

Since then more than 800 people, mostly civilians, were killed across Lebanon where much of the infrastructure has been severely damaged. Over 50 people died in Hezbollah fire on northern Israel.

Nasrallah scoffed at Ehud Olmert, "the most stupid" prime minister in Israel, who was "killing women and children ... because has complexes and wants to prove that he is a great leader."

He also criticised the "criminal" US administration which he said was responsible for Israel's "massacres" in Lebanon.

"Whatever the results of this war, Lebanon will not fall to America or Israel, and will not be part of the New Middle East," which the US administration was calling for, he said.

Nasrallah vowed that "the bombardment on the (northern Israeli) settlements will continue, in increased quantities and stronger arms."

But added "when we bombard the settlements ... it is a reaction," he said.

"Any time you decide to stop bombarding our villages, we will not hit your settlements. We prefer if the combat was military against military, on the battlefield," he said.

"You have no other choice but political settlement," he said.

Nasrallah denied claims that the Israeli army was "controlling" regions of southern Lebanon in its incursions and battles in the region.

"The battles are on the frontlines and the villages of the frontlines ... the mujahedeens are fighting to the last bullet and the last soul," he said.

"The enemy is counting on the policy of lies maybe because it is its nature or maybe because it is part of the psychological war ... any claims of controlling territories are not true and lies," he said.

He hailed the "mujahedeen's heroic confrontations at the frontlines ... in the face of battalions, elite troops, parachutists, armored tanks of the Israeli army, and under intense air cover."

Nasrallah said his guerrilla group respected the 48-hour lull this week by halting bombardments on northern Israel, although Israeli air strikes continued on Lebanon.

But Israel, he said, understood the halt as a weakness on the part of Hezbollah.

"This only meant that the resistance maintained complete control ... it proves that their is a leadership ... and that there is a base which receives and carries orders," he said.

"Proof to this is that as soon as the lull was over, the Islamic Resistance fired in just one day over 300 missiles."

Nasrallah also denied that the five people captured by an Israeli airborne commando near the eastern city of Baalbek on Wednesday were Hezbollah members.

"They are not prisoners or war, they are hostages ... they should be freed unconditionally and without any prisoners' exchange," he said.

He said that the Israelis suffered a major intelligence failure as they made a landing at an empty Hezbollah-run hospital and captured five civilians because "they carried my family name."

Nasrallah said that his guerrillas hit a SAAR 4.5 Israeli warship off the coasts of the southern port city of Tyre on Monday, but that "fog" had prevented them from filming the attack.

The Israeli army has denied the claim.

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