A United Nations human rights inquiry said on Friday that Israel should be made to pay compensation for damage caused by the month-long Lebanon, especially losses incurred by civilians.

It suggested setting up an international compensation program similar to the one which has paid out billions of dollars to cover losses due to Iraq's 1990-91 invasion and occupation of Kuwait.

But the three-member commission of inquiry left any decision to the UN Human Rights Council.

"It should consider creation of a commission competent to examine individual claims for reparations and compensation...," commission member Joao Clemente Baena Soares told a briefing.

"If the council, the international community, wishes to set up a mechanism, I remind you that the Security Council established a commission on Iraqi reparations for Kuwait. Why not also a commission for Lebanon?" commission member Stelios Perrakis told reporters.

Israel denounced the UN investigation, saying the report ignored Hezbollah militants who fired 4,000 rockets at Israel.

Itzhak Levanon, Israel's ambassador to the United Nations in Geneva, said in a speech to the UN Human Rights Council that its three-member commission of inquiry had produced a "report rife with imbalances and misrepresentation."

The three legal experts, sent to Lebanon to probe charges of "systematic targeting and killing" of Lebanese civilians by Israel, said in a November 21 report that Israel was guilty of "excessive, indiscriminate and disproportionate use of force" in the war.

They said their limited mandate prevented them from probing Hezbollah's actions, and commission members rejected Israeli and U.S. charges the commission was one-sided.

"Of course it (the report) was not one-sided, it was within the limits imposed by the mandate," Perrakis told reporters.

U.S. ambassador Warren Tichenor said: "No report can be credible that attempts to find facts and draw conclusions about an armed conflict without examining the actions of both sides."

Levanon said the UN report was wrong to omit a reference to "Lebanon's obligations to prevent the use of its territory for hostile acts and to disarm and disband Hezbollah."

"The disturbing reality is that the conflict in Lebanon was the direct result of an unprovoked Hezbollah attack, emanating from Lebanon into Israel," he said.

The war broke out after Hezbollah captured two Israeli soldiers in a cross-border raid on July 12.

Levanon said Israel had been forced to act in self-defense, confronted by "Hezbollah terrorists on one hand, who deliberately made every effort to create civilian casualties on both sides, and its own forces on the other hand, who were committed to making every effort to minimize them."

Around 1,200 Lebanese and more than 150 Israelis were killed in the 34-day confrontation.

The UN commission charged that Israel did not limit assaults to military targets and had made excessive use of cluster bombs which have continued to injure and kill after the war's end. This amounted to collective punishment, it said.

Levanon stressed Israel had no wish to injure Lebanese civilians and had tried to spare their lives by dropping leaflets and giving advance warnings of its military actions.

"Israel did this, knowing full well that it would give Hezbollah time to escape, regroup and set up ambushes, and that Israel would endure casualties at the expense of military surprise," Levanon said.

"Israel's conduct, which far exceeds the requirements of international humanitarian law, proved itself in practice, reducing injury to civilians," he said.

Perrakis said Lebanon's fishing and farm industries had been damaged by Israeli attacks, and oil spills from refineries had reached Cyprus, Turkey and Greece.

The inquiry had established that Israel bore international responsibility for the violations and damage, he said.