A senior Hezbollah commander on America's most wanted list was killed in a car bombing in Syria that the Shiite militant group blamed on Israel on Wednesday, an accusation the Jewish state denied.

Imad Mughnieh, who headed Hezbollah's special operations unit, died in car bombing in a residential neighbourhood of the Syrian capital late on Tuesday, Hezbollah officials said.

Syrian state television reported only that one person had died in the bombing without identifying the victim but Hezbollah confirmed that it was Mughnieh who had died and accused Israel of killing him.

"A great jihadist from the Islamic resistance in Lebanon has become a martyr," Hezbollah said in a statement. "Haj Imad Mughnieh died a martyr at the hands of the Israeli Zionists."

In Jerusalem, Prime Minister Ehud Olmert's office denied that Israel was behind the killing.

"Israel rejects any attempt by terrorist organisations to attribute to it any implication in this affair," a statement from his office said. "We have nothing else to add."

But senior Israeli figures welcomed news of Mughnieh's death, while the news media were quick to predict that Hezbollah would attempt to carry out revenge attacks against Israeli targets.

Mughnieh, in his late 40s, was wanted for his suspected role in a string of attacks against American and Israeli targets, including the 1992 bombing of the Israeli embassy in Buenos Aires which killed 29 people and the abduction of Western hostages in Lebanon in the 1980s.

He was also linked to the bombing of the US marine barracks at Beirut airport in 1983, in which 241 American servicemen died and the hijacking of TWA Flight 847 in 1985, in which a US navy diver was killed.

After the hijacking, the United States offered a reward of upto five million dollars for information leading to Mughnieh's arrest.

Western intelligence services suspected him of working directly for Iranian intelligence and he was on the US State Department's list of most wanted terrorism suspects.

Hezbollah's Al-Manar television interrupted its normal programming to broadcast music to mark his death.

Senior Shiite cleric Sayyed Mohammad Hussein Fadlallah issued a statement saying that "the resistance has lost one of its pillars".

Residents of Mughnieh's home village of Tair Debba, some five kilometres (three miles) east of the Lebanese coastal town of Tyre, gathered in the street to listen to radio and television reports about his death.

"We heard that he was killed in a car bombing in Syria," village mayor Hussein Saad told AFP, adding that he had declared three days of mourning.

Saad said that Mughnieh's brothers, Jihad and Fuad, has also been killed in car bombings, in their cases in Lebanon, in 1984 and 1995.

Several reports at the time of Fuad's killing suggested that Imad was the target and not his brother.

Hezbollah announced that Mughnieh's funeral service would be held on Thursday.

Witnesses in Damascus told AFP that bomb went off in a car park in the newly completed residential neighbourhood of Kfar Suseh at around 11 pm (2100 GMT) on Tuesday.

The rear of the Mitsubishi Pajero was entirely blown out by the force of the blast, an AFP photographer reported.

After the explosion, police prevented journalists from getting near enough to the scene to see if there had been any casualties.

The windows of nearby buildings were blown in and four cars parked close by were damaged.

In Israel, Dany Yatom, a former head of the Mossad spy agency, said he did not know who had "liquidated Imad Mughnieh, but it was a success for the intelligence community. He was one of the biggest terrorists in the world, in the same league with Osama bin Laden."

Radio and television there interrupted normal programming to announce the death of what one broadcaster called "the most dangerous of terrorists in the Middle East in the past 30 years."