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Israel and Hezbollah both loudly proclaimed victory yesterday, with leaders on both sides of the bloody 34-day war seeking to justify the conflict's heavy costs as a fragile ceasefire entered its second day.

"We are today before a strategic, historic victory, without exaggeration," Hezbollah's leader, Sheik Hassan Nasrallah, said in a televised speech that was met with celebratory gunfire in the Shia suburbs of Beirut.

"We emerged from the battle with our heads high, and our enemy is the one who is defeated."

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In an impassioned address to the Knesset, Israeli Prime Minister Ehud Olmert said "the IDF warriors always had the upper hand," and promised to hunt down Hezbollah's leaders.

"The leaders of this terrorist organization have gone underground and from there they are busy spreading lies and concealing the truth about the toll exacted on them and their men. They will not go unpunished. We will continue to haunt them everywhere and at all times," he said.

"This resolution is a diplomatic achievement for Israel, but its significance is vital to all the countries of the free world fighting global terrorism. The entire international community shares the concept that the terror state created within Lebanon must be eradicated."

As the leaders sought to shape the view of the conflict, tens of thousands of Lebanese clogged roads to the south in an effort to return to the homes they fled during the war.

One child was reported killed and 15 people injured by unexploded ordnance left behind after the fighting.

"We are happy, because the war has stopped. We are happier because Hezbollah won, the resistance won," said Ali Hassan, a 46-year-old fisherman south of the port city of Sidon who watched as streams of ex-refugees drove south in long lines, flying yellow Hezbollah banners from their cars.

Mr. Nasrallah said that it would be a "big mistake" to talk of disarming Hezbollah.

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Lebanon's cabinet remains divided on the question of disarming the militant group.

Hezbollah has two cabinet members and 14 members in parliament. Some observers have warned that an impasse on disarming the militia could derail the ceasefire agreement entirely.

Late Monday, Lebanese Defence Minister Elias Murr said 15,000 soldiers would be deployed north of the Litani by the end of the week, agencies reported, although it was unclear when the soldiers would move farther south.

In Israel, Mr. Olmert faces his own struggles. Early support for the war has given way to a slump in the polls. A new Globes-Smith poll showed his Kadima party would have little chance of winning re-election now, and a Yediot Aharonot poll showed 58 per cent believe Israel has achieved none or few of its goals in the conflict.

Mr. Olmert told the Knesset he took full responsibility for the conduct of the battle with Hezbollah. Three legislators were ejected from the chamber for heckling the Prime Minister and opponents on the right and left demanded an investigation into the government's conduct.

"There were many failures: failures in identifying the threat, failures in preparing to meet the threat, failures in the management of the war, failures in the management of the home front," Benjamin Netanyahu, head of the opposition Likud Party, told the Knesset.

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"Without a doubt we shall need later on to learn the lessons and fix the mistakes."

Friends of the soldiers still held captive in Lebanon protested in Tel Aviv last night, frustrated that the release of Ehud Goldwasser and Eldad Regev was not made a ceasefire condition.

Fighting did not cease entirely in Lebanon; Israeli forces reported killing six Hezbollah fighters yesterdayMONday. And a dozen rockets were fired during the early hours today TUESday at positions held by Israeli soldiers in south Lebanon, without causing any injuries, an army spokesman said.

The death toll from the conflict is not yet clear. Hezbollah has reported only 68 fighters killed; Israel has said the number is about 400 and has dropped leaflets with 180 names of guerrillas the army has said it has confirmed to have killed.

The civilian death toll in Lebanon is estimated at 1,100, while 41 Israeli civilians and 118 soldiers have been killed.

In Tyre, residents experienced their first quiet night in more than a month - no gunfire and no Israeli drones. But streets were deserted, despite the human tide that surged south.

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"We have been away for a month. We have to go home and bury our martyrs," said Layal Aalayian, a 50-year-old mother of seven. She was from Qana, a particularly hard-hit town where townspeople yesterday were reportedly still pulling corpses from the rubble of destroyed buildings.

She said wasn't sure the ceasefire would hold, and was scared to go back, but felt she had little choice. "We can't trust Israel. We just have to hope."

Israelis, too, woke up to silent skies yesterday and army orders intended to prevent residents of Kiryat Shmona and other northern towns from leaving their shelters went largely unheeded, as a slow stream of cars headed north to inspect the damage. Residents of Tiberias, Afula, Haifa and Nazareth were given the all-clear to resume life at home.

"Nothing has fallen today so we're OK - we hope that this will last," said Freddy Msika, 68, from his lottery kiosk on Kiryat Shmona's main street, where he did a brisk business yesterday. Shops around him began to open to customers and people walked the streets freely for the first time in more than a month - many walking equally pent-up dogs.

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