Human Rights Watch has today released a Q&A paper which attempts to outline the rules of international law that apply in the current conflict between Israel and the Hezbollah. They make no attempt to assess the legitimacy of either side's move to resort to war. The stated purpose of the document is to "provide analytic guidance for those who are examining the fighting as well as for the parties to the conflict and those with the capacity to influence them."

It is well worth reading to gain an understanding of what is and is not considered legitimate conduct in accordance with the Geneva Conventions and customary international humanitarian law.

It is worth noting that HRW considers Hezbollah, and not Lebanon itself, as the combatant party against Israel.

On my reading of things, there appears to be a prima facie case that the Hezbollah are guilty of war crimes for (a) capturing opposing soldiers for use as hostages, and (b) for the firing of Katyusha missiles indiscriminately at civilian areas. (The specific issues with Katyushas is addressed in the HRW's article.)
Israel's culpability for war crimes is not so clear cut - according to HRW, civilian areas can be considered legitimate targets if they serve a "dual-purpose" as military installations, however all reasonable effort must be taken to avoid harm to civilians. Israel might be on shakier ground with the bombing of key infrastructure and blockading of roads and ports, especially if these are done to cause hardship to civilians in order them to pressure their government into taking action.

HRW has earlier expressed its concern over Israel's conduct in the Gaza Strip, while also asserting that the Palestinian capture of Gilad Shalit as a hostage is a war crime.