Yeah, they seem to have Israel between a rock and a hard place.
Israel needs to disregard the opinions of people who hate them anyway, and go after Hezbollah's bunkers with something that will suck up all the air in the vicinity of the explosion and kill every last living thing.
First, they need to warn the Lebanese civilians to get outta town, because it's gonna blow up. Notify the UN of that intent, and give them 24 hours to leave.
Notify the UN that any "civilians" left after that will be presumed to be working in sympathy of Hezbollah, or that they are being held against their will as "human shields". Under the rules of war, that makes any "collateral damage" Hezbollah's karma.
Then use a fuel-air device like a DaisyCutter or MOAB to incinerate the town completely off the face of the earth, killing every Hezbollah in every bunker in the area.
I guarantee you, it will NOT be ANY kind of victory for Hezbollah, propaganda or otherwise.
If Israel demonstrates that kind of resolve, it will win them the grudging respect of many in the middle east, and it will discourage further aggression against them by people who have, in the past, mistaken Israel's inherent sense of humanity for weakness.
Lather, rinse, repeat. :)