The boy was the first civilian killed in an attack by the guerrilla group in the area since Israel pulled out of southern Lebanon in May 2000, officials said.
The attacks came amid an increase in border violence following months of calm, raising fears of wider conflict with Syria and Lebanon. Earlier Sunday, Israel's foreign minister warned those countries to restrain Hezbollah, or "we will have no choice but to defend ourselves."
Aides to Israeli Prime Minister Ariel Sharon said, however, that Israel is trying to avoid an escalation and would try to resolve the situation through diplomatic channels.
Also Sunday, Sharon told his Cabinet that the U.S.-backed plan for Palestinian statehood would not move ahead until the Palestinians carry out their pledge to dismantle militant groups. The military chief of staff, Lt. Gen. Moshe Yaalon, said later that Palestinian security forces weren't doing enough to stop attacks.
Palestinian legislator Saeb Erekat said it was Israel, rather than the Palestinians, which was failing to live up to its commitments.
The cross-border fighting began this month. On Friday, Hezbollah, a militant Lebanese group backed by Syria and Iran, fired artillery toward Israeli border posts, drawing return fire. It was the first such exchange in eight months.
The military said the Israeli aircraft hit Hezbollah artillery positions from which the tank shells had been fired at Shlomi, a working-class town of about 6,000 people close to the border.
Hezbollah said the shelling was in retaliation for the Aug. 2 killing of Hezbollah security official Ali Hussein Saleh by a bomb in his car south of Beirut. Israel refused to comment on the claim that it was behind the killing.
The guerrilla group also fired anti-aircraft shells Saturday on Kiryat Shemona, but no injuries were reported.
On Sunday, 16-year-old Haviv Dadon was walking home from a summer job when he was hit by the anti-tank shell fired on the northern town of Shlomi. Five bystanders, including a woman and her 9-month-old son, were lightly injured, hospital officials said. At the teen's funeral, mourners said they felt abandoned by the government.
One shell exploded near a preschool and another hit near a shopping center, said the mayor, Gavriel Naaman. Video footage showed patches of blood left on a concrete staircase.
The streets of the town were deserted by nightfall, with residents staying in their homes or in bomb shelters. "We are very afraid," said resident Lara Elhai, 50. "Any moment, they could shoot at us. It's the summer holidays, and we can't even send our children to the pool."
The last civilian death in such an attack along the northern Israeli border happened June 24, 1999, when a Hezbollah rocket struck the city hall of Kiryat Shemona, killing two men.
In response to the latest death, Israeli warplanes fired at least one missile near the village of Teir Harfa, about two miles from the Lebanese-Israeli border. No casualties were reported.
A senior Israeli security official, speaking on condition of anonymity, said the warplanes hit the Hezbollah artillery positions that fired at Shlomi.
Hezbollah said it had fired anti-aircraft shells at Israeli fighter jets flying over southern Lebanon, but Israeli security officials denied aircraft were in the area at the time.
A senior military source said Israel's inner security Cabinet would meet to discuss a further military response and that more strikes could be expected. However, Raanan Gissin, a Sharon aide, said that while Israel would not tolerate Hezbollah attacks, it has "no intention of escalation."
Hezbollah, which is on the U.S. State Department's list of terrorist organizations, led a guerrilla war against Israel's 18-year occupation of a border zone in southern Lebanon that ended in May 2000.
Israeli Foreign Minister Silvan Shalom held Lebanon and Syria — which dominates Lebanese policy-making — responsible for Hezbollah's actions.
"We say to Syria and Lebanon as responsible parties ... that if Hezbollah activities continue and constitute an undermining of security of the citizens of Israel, we will have no choice but to defend ourselves," Shalom said Sunday.
Israel's ambassador to the United Nations sent a letter to U.N. Secretary-General Kofi Annan holding the Syrian and Lebanese governments responsible for Hezbollah's "acts of terror," Foreign Ministry spokesman Yonatan Peled said.
Annan issued a statement condemning the shelling and urging "all governments that have influence on Hezbollah" to deter it from further actions that could increase tension. He also urged Israel to exercise "utmost restraint."
American diplomats also told Lebanon and Syria that the administration was concerned about the "calculated and provocative escalation" by Hezbollah, State Department deputy spokesman Philip T. Reeker said.
Hezbollah Deputy Secretary-General Sheik Naim Kassem said Sunday that Hezbollah "is fully prepared and ready to respond in the proper manner to any Israel aggression or threat."
"This anti-aircraft fire is fired as a reaction to warplanes that regularly violate Lebanese airspace," he said in an interview with the Dubai-based Al-Arabiya satellite station.
Syria's state-run Tishrin newspaper charged in an editorial that Israel was trying "to expand the circle of its aggression and deliberately provoke and threaten more than one Arab country," in hopes of slowing progress on the "road map" peace plan with the Palestinians.