It comes down to a simple question: Is what Israel doing necessary to protect it's security?
If it IS necessary, then it's justifiable. If it's unnecessary, then it is collective punishment, and that's not only against the Geneva conventions but morally unjustifiable.
The question is not whether any action is necessary, though; the question is whether Israel's specific actions have been restrained to what necessity requires. Since the necessity in question is security, the key question in turn is whether Israel is increasing or decreasing its future security by employing such widespread bombing in Lebanon. If it breeds more terrorists through its actions than it eliminates and/or deters, then it's not helping its security, but engaging (unwittingly or not) in collective punishment, which is both illegal and morally unjustifiable.
(Yes, I'm aware that Hezbollah situates themselves within civilian areas in order to defend themselves. Unfortunately, that doesn't change the fate of those who are caught in the crossfire; dead is dead. You can't level a city to take out a few terrorists, any more than you could nuke a country to take out a few terrorists. The question has to be whether the civilian casualties are worth it, and so far, I haven't seen enough evidence that they are.
Unlike some, I think the jury is still out, but I don't think the evidence is on the side of the Israelis.