There were many funerals last week, and this weekend there were more. At least 13 Lebanese villagers, including women and children, were killed yesterday in an Israeli air strike on a convoy of vehicles evacuating a village near the southern border. And few expect the funerals to stop soon. Yesterday Israeli and Hizbollah leaders declared 'open war'; bodies of four Israeli sailors were retrieved from a warship struck by a Hizbollah drone; beyond Beirut, bombing continued in the Hizbollah heartland of southern Lebanon and even reached the Syrian border; and dozens of Hizbollah rockets continued to fall randomly on civilian areas in northern Israel, reaching as far south as Tiberias, some 40km inside Israel's borders, causing minor injuries and provoking panic. Further south, though the worst violence of the week had ebbed, the Gaza Strip, from where rockets have been fired into Israeli towns, remained tense, with reports of an Israeli air strike and two dead.

And as the violence continued, so the shock waves around the region and the world grew deeper. The crisis, which has pushed oil prices to a historic high of $78 per barrel and weakened stock markets around the world, dominated the agenda of the G8 summit of rich nations in St Petersburg, dividing international leaders. In the Middle East itself, Syria and Iran, deeply implicated in the events of the past week, are on high alert. The Egyptians, Jordanians, Turks, Saudis - and, of course, the Iraqis - are all very nervous. America is increasingly involved. Diplomats are frantically formulating plans to defuse what one described to The Observer as 'a powder keg that could blow out all the lights'. And all this in just five days.

The questions are now manifold and evident; answers less so. How and why did the crisis explode so powerfully and so quickly? What are the regional ramifications? And what happens next?

As ever in the Middle East, the crisis can be traced back to a variety of causes. The timeline can start a few days ago - with a daring cross-border raid by Hizbollah militants on Tuesday that led to the capture of two Israeli soldiers and the deaths of eight more. Or it can start two weeks ago - with the kidnapping of another Israeli soldier by hardline Palestinian militants from the Hamas organisation in the Gaza Strip. Or it can start months, years or decades ago in the myriad interwoven causes that link Israel's withdrawal from south Lebanon in 2000, the development (with Iranian assistance) of the Hizbollah militia in response to Israel's invasion of Lebanon 18 years earlier, and even the Iranian revolution of 1979, or the Arab-Israeli wars of 1973 and 1967.

For Ehud Olmert, the recently elected Prime Minister of Israel, the crisis started on Wednesday with Hizbollah's cross-border attack. It should have been expected. The militia's leader, Sheikh Hassan Nasrallah, has repeatedly said that it would seek to capture Israeli soldiers on or near the border, and has been trying to do so since moving back into the frontier zone following the Israeli withdrawal six years ago. The army was 'caught with its pants down', said one Israeli commentator last week.

As soon as Olmert - said by associates to be 'incandescent' with rage - heard of the incident, he called an emergency meeting of the inner security cabinet. Around the table with the right-wing Prime Minister, who leads the Kadima party, were his senior ministers and leaders of the other parties, including the profoundly orthodox Shas, who comprise the ruling coalition. The politicians were briefed by the head of the army, Lieutenant-General Dan Halutz, the head of the internal security service, the head of Mossad, and a series of other military advisers.

Halutz's plan mixed various aims. There was little real hope that the pressure on Hizbollah might force the immediate return of the soldiers. But a land, air and sea blockade would prevent Hizbollah receiving supplies and prevent the militia evacuating the hostages to Syria. A tight cordon coupled with air strikes would allow the destruction of Hizbollah's military capacity. In addition, the physical damage wreaked by the bombing would force the government of Lebanon (and the international community) to act against the Islamic militia, hopefully implementing a recent UN Security Council resolution calling for Hizbollah's disarmament and the positioning of Lebanese troops on the southern border. Civilian suffering leading to anger against Hizbollah would, the politicians and military men knew, force the Lebanese, or the international community, or both, to act rapidly. The plan was accepted unanimously. 'If our security and economy is being hit,' said one minister, 'so shall Lebanon's.'

Their responses were, given Israel's history, relatively predictable. The Jewish state's strategic doctrine has always relied, along with massive foreign aid, on a powerful, ruthless and immediate response to any threat. As a final bonus, the Hizbollah attack offered an opportunity to restore the 'deterrence factor' - a key aim of the hawkish chief of staff who has a significant influence on a government that contains fewer former soldiers than almost any other previous Israeli administration. 'There has been a progressive decline in deterrence over the past six years and the defence establishment want to re-establish it,' said Jonathan Spyer, a former adviser on international relations to the Israeli government and a research fellow at the Global Research in International Affairs Centre in Hertzeliya. 'They see it as a very serious big boy's game.'

Crucially, Halutz's plan was not new. Indeed, according to Gerald Steinberg, professor of political studies at Bar Ilan University, it had been sitting 'on the shelf' for some time. 'The scenario that has been followed has been worked on by the military for several years,' Steinberg said. 'Sharon was briefed on it when he was Prime Minister and it is probable that Olmert knew about it.' Yet the more hardline Israelis were not the only ones acting according to a script. Indeed, the script may well have been written elsewhere: in Beirut, Gaza, Damascus and Tehran.

On Thursday morning, the people of the village of al-Dweir, a few miles from the Israel-Lebanon border, gathered at the mosque for a family funeral. Rockets launched by Hizbollah fighters could be heard echoing off the low hills of the border area. Overhead, Israeli jets and drones circled unheeded by a crowd full of Hizbollah members and supporters. Before long, the yellow and green flag of the Shia group was fluttering.

Dr Yousef Akkash was among the mourners. His brother, killed along with his wife and eight children earlier in the day when Israeli planes obliterated their home, was possibly a member of Hizbollah, but Akkash was not sure. 'I hope he was,' Akkash said. 'If he was engaged in Hizbollah activities, then it was his fate.' But it was a fate that lay in the hands of shadowy men in different countries.

Israeli diplomats last week insisted on an 'axis of evil' linking Hamas in the Gaza Strip, Hizbollah, Damascus and Tehran. 'They are united to destabilise the situation and act against the wills of most people and governments in the region to progress a peace process,' said Barnea Hassid, an Israeli spokesman.

The argument here is simple. The past few months have seen several developments that have displeased those who stand to benefit from continued strife. There has been an improvement in relations between moderate Palestinian leaders and Olmert, who is committed to a disengagement of Israeli forces and settlers from the West Bank and hints that even elements of Hamas might be shifting towards a more pragmatic position. In addition, the Syrians, forced to leave Lebanon last year, have become marginalised and Hizbollah has begun to lose credibility. In addition, Tehran is under huge international pressure because of its nuclear programme. Nothing would benefit hardliners in Gaza, Lebanon, Damascus and Tehran more than a nasty and bloody war. 'It is a good thing for Damascus and Tehran,' said Spyer. 'They are largely behind what we are now seeing..'

However, experts point out that there is little history of contact between Hizbollah and the Sunni Muslim Hamas. And though a senior Hamas militant in Damascus is suspected of running the kidnapping of the Israeli soldier in Gaza, that does not mean, says one Western intelligence source, that the Hizbollah strike last week was part of a co-ordinated strategy. And the relationship between Iran and Hizbollah may be more nuanced than often thought. 'The Iranians are in trouble over the nuclear programme, and the Syrians are under pressure, too, and chaos and diversions benefit both,' said Nadim Shehadi, of London's Chatham House think tank. 'But Hizbollah is more linked to Tehran than Damascus.'

An axis may exist, but in a rougher, more informal form than the tight-knit institutional connections seen by the Israelis and their allies. 'If you ignore state borders, you can see a broad anti-American and anti-Israeli front, with Iran leading it. They are playing a clever game. The Iranians are playing chess: their opponents are playing poker.'

One critical question is the degree of support that Hizbollah, which has a well-armed militia and a large social programme, has among Lebanon's poor Shias. The consensus is that the militia had been losing support before the crisis. That may be one reason for Wednesday's attack, even if the reaction of the Israelis was greater than foreseen. 'Hizbollah was being squeezed,' said Steinberg. 'It was "use-it-or-lose-it" time.'

Initially, it looked as if those tactics might have worked. On Wednesday night, as news of the kidnapping broke, teenagers on motorbikes rode up and down Beirut seafront waving the party's yellow flag and honking horns. Even after bombardment chewed up the highway to Damascus and put the airport out of action, celebrants were setting off firecrackers. But as the extent of Israel's onslaught on Lebanon's infrastructure became clear, the atmosphere changed.

'In 1982, I was anti-Israel,' presidential candidate Chibli Mallat told The Observer. 'But this offensive has been provoked by a blatant violation of the demarcation line and the abduction of soldiers. I cannot put the blame on the Israelis. They did not start it.'

Few Lebanese accept Hizbollah's claim that its aim was to barter the release of the handful of Lebanese still held in Israeli jails: they blame Hizbollah for plunging Lebanon back into war. Everywhere there is widespread recognition that, even if the Lebanese government, with its pro-Syrian President and predominantly anti-Syrian administration and parliament, wanted to rein in Hizbollah, it could not. 'The Israelis blame the Lebanese government for not controlling Hizbollah,' said architect Simone Kosremelli. 'Is Italy able to control the Mafia? Could England control the IRA? Israel must know that 50 years of conflict have not brought a solution. There must be another way.'

If there is, it will almost certainly involve the international community. Vladimir Putin, Russia's leader, had hoped to use this weekend's G8 summit to showcase the economic progress in his nation. Officially, education and the fight against HIV head the agenda, but attention has focused on the Middle East - and divisions between the summiteers. The splits echoed those over Iraq three years ago, with France's Jacques Chirac leading condemnation of the Israelis, European Commission president Jose Manuel Barroso saying that the use of force by Israel was 'disproportionate', Putin calling for the Israeli response to be more 'balanced' and President Bush avoiding any condemnation of Israel, saying 'the best way to stop the violence is for Hizbollah to lay down its arms and to stop attacking.'

However, with a meeting this weekend of Arab foreign ministers in Cairo disintegrating in mutual recriminations, the EU lacking a clear strategy and the UN lacking credibility, the Americans may hold the real key. 'The Israelis tend to go as far as they can, as quickly as they can, to make their point and strengthen their negotiating position before the international pressure on them gets too much to bear,' said one Western diplomat. 'The US can bring 10 times as much pressure to bear as anyone else.'

Bush has so far largely left discussions with Israeli leaders to Secretary of State Condoleezza Rice and National Security Adviser Stephen Hadley. Rice, after conversations with UN secretary-general Kofi Annan, has backed the dispatch of a UN team to the region to attempt to negotiate a truce, but few believe it has much chance of immediate success.

A key question is whether Israel will escalate its military response to Hizbollah's continued provocation - yesterday rockets fell deeper and deeper inside Israel. A spokesman refused to rule out a ground offensive, though casualties would be high and the political fall-out of a botched operation potentially devastating. However it may be that a negotiated settlement - exchanging prisoners in Israeli jails as part of a more general agreement that would see the return of the captured Israeli troops and Hizbollah pulling back from the frontier - is possible. Though Israeli demands for the disarmament of Hizbollah may be unrealistic in the short term, they may not be in the long term.

However, it may be that a fuse has been lit. 'The nightmare scenario is war in Gaza, widespread war against the Israelis in Lebanon and between factions, Syria and Iran being dragged into the conflict and a steady escalation from there to who knows where, widespread conflict, oil prices through the ceiling, bombs going off all over the place' said the diplomat. 'You don't usually see the nightmare scenario evolve in the Middle East but, if it does, we are all in deep, deep trouble.'

Perhaps the most hopeful sign is that the vast bulk of the Lebanese and Israeli populations still do not wish harm on one another, though tensions have heightened antagonisms and, in Israel at least, provoked a strong pro-war solidarity.

During a rocket barrage on Friday afternoon, a missile landed in a kibbutz on the edge of the northern Israeli town of Nahariya. As the community had already been almost entirely evacuated, there were no casualties.

Avi Hever, a long-time resident, was one of just four men who chose to stay behind after the first missiles landed last week. 'I was watching TV when I heard the missile go over the house and explode,' he said. 'I went into a safe place between the two walls and the house was shaking all over. Its unpleasant, shocking; it makes you freeze.'

Pointing to empty rooms, he explained that he has sent his wife and two children to his family in Tel Aviv, an exodus mirroring that of Lebanese civilians further north. The Observer asked if he sympathised with those caught up in the same conflict living just a few miles away over the border.

'It's quite hard to feel empathy at the moment, when just 10 minutes ago a rocket hit here and I was in danger. But empathy will come,' he said, glancing across the neat houses, with their groomed front lawns, the Star of David flags flapping defiantly from the rooftops. 'We do want peace and the Lebanese want the same as us. But it's up to them now; they have to choose which way they want to organise their life, with Hizbollah or without it.'

Outside the village of Damour on Lebanon's coast, holes that are dozens of feet wide have shattered a key highway overpass that connects Beirut to the south of the country. It is also the only way out of the war zone for many of south Lebanon's residents, who have been clambering over the piles of rubble and around the craters on their way to Beirut or the northern Bekaa Valley and safety.

'This is a fight between Hizbollah and Israel,' said Umm Mohammed, 36, a Shia woman from outside Tyre. 'Why must they hurt civilians? I have small children.' And she looked nervously to the sky.

Key Players of the Conflict

Sheik Hassan Nasrallah: Chief of Hizbollah in Lebanon
Has close links to Syria and Iran. Told Israel: 'You wanted an open war and we are heading for an open war'.

Bashar Assad: President of Syria
Denied being behind the Hizbollah attack. Syria's relations with Lebanon strained since last year's killing of former Lebanese premier Rafif Hariri that led to withdrawal of Syrian troops.

Fouad Siniora: Lebanese Prime Minister Critic of Syria
but he has been so far unable to disarm Hizbollah, a group he calls 'legitimate resistance'. In a difficult position with two Hizbollah ministers in his cabinet.

Ehud Olmert: Israeli Prime Minister
Said he would agree to a ceasefire if Hizbollah returned the two captured soldiers and stopped firing rockets but has rejected calls for restraint from UN's Kofi Annan.

Mahmoud Ahmadinejad: President of Iran
Iran was where Hizbollah was founded and it retains close links. Tehran warns of a 'fierce response' if Israel strikes at Syria.

Countdown to Crisis

25 January: Hamas defeats moderate Fatah in Palestinian elections.

10 April: EU severs political contact and suspends direct aid to Palestinian government.

9 June: Hamas calls off 16- month military truce after seven members of a Palestinian family are killed on a Gaza beach by Israel shell. Four days later a family of nine die in Israeli missile strike in Gaza.

25 June: Palestinian militants launch raid into Israel, killing two Israeli soldiers and kidnapping Cpl Gilad Shalit.

29 June: Israel troops, having pushed into Gaza, detain Hamas lawmakers and cabinet members. Air strikes.

12 July: Hizbolla captures two Israeli soldiers and kills eight. Israel calls it 'act of war' and widens Gaza offensive, killing 24 civilians. Air strikes destroy 10 bridges in Lebanon, and hit power stations and a water facility.

13 July: Israel bombs Palestinian Foreign Ministry and Bierut airport. Navy blockades Lebanese ports. The US

14 July: Israel bombs Beirut-Damascus road and Shia suburbs of Bierut: 67 Lebanese civilians dead. Hizbollah launches 130 missiles at Israel, killing at least two civilians. Israeli ship is hit by an explosives- filled drone, four dead.

15 July: In the village of Marwaheen - 500 yards from the Israeli border, an air strike kills up to 13.