Early morning reports reveal that at least three rockets fired from southern Lebanon exploded in northern Israel today. Israel fired back in what a spokesman called "a pinpoint response." Israeli officials had said they were prepared to deal with an attack from Lebanon since it began its incursion into the Gaza Strip, but it raises the possibility that the violence could spread and open a second front for Israel. No one has claimed responsibility, and the Lebanese government condemned the attack. The Los Angeles Timesincludes news of the attack in its inside pages and notes that the rockets were "the kind Hezbollah used during its 34-day war with Israel in mid-2006." The Washington Postleads with a local story that looks at street closings planned for Inauguration Day and off-leads the Red Cross accusing Israel of neglecting the wounded in Gaza and preventing ambulances from reaching a devastated area, where rescue workers found at least 15 bodies and several emaciated children yesterday. The Post includes early word of the rockets from Lebanon and notes they were the first fired into northern Israel since the 2006 war.

USA Todayleads with the Congressional Budget Office predicting that the budget deficit would reach a record $1.2 trillion, and that's without counting the stimulus package currently under discussion and the wars in Iraq and Afghanistan. The New York Timesmentions the CBO projections in its lead story but focuses on President-elect Barack Obama saying that "a central part" of his efforts to decrease federal spending will involve an overhaul of Medicare and Social Security. The Wall Street Journal leads its world-wide newsbox with Obama affirming that he'll continue to pursue a massive stimulus plan despite the projected deficit. The LAT leads locally and off-leads a look at how it appears to be increasingly likely that lawmakers won't pass an economic stimulus package until mid-February. Many experts warn that if the package is delayed for too long or gets bogged down by pet projects, it might not be as effective in propping up the moribund economy.

The scene that rescue workers came across in a neighborhood south of Gaza City yesterday appears to have been nothing short of horrific. In one home, they found 12 corpses lying on mattresses and four emaciated young children lying next to their dead mothers. The children, who were too weak to stand, were rushed to a hospital. The Red Cross issued what the Post describes as "an unusual public statement" from its Geneva headquarters saying that Israel had "failed to meet its obligation under international humanitarian law." The Red Cross says it had to use donkey carts to evacuate 18 wounded survivors because ambulances couldn't reach the site.

After a three-hour cessation in hostilities to allow humanitarian aid to reach Gaza residents, the fighting continued. As the Palestinian death toll reached 683, Israel said it was in "fundamental agreement" with a French and Egyptian cease-fire proposal and announced that two senior officials would travel to Egypt today to begin discussions. While this provided the first signs that diplomatic negotiations could begin in earnest, no one is expecting a quick resolution. "There is an agreement on general principles, that Hamas should stop rocket fire and mustn't rearm," a senior Israeli official tells the NYT. "But that's like agreeing that motherhood is a good thing." The WSJ notes that while there are "a flurry of other negotiating tracks," Cairo seems to have become "the hub of diplomacy" as Egypt and France "appear to be trying to step into the void" left by the lack of diplomatic leadership from the United States.

In what can only be described as an incredibly prescient piece, the LAT goes inside with a dispatch from Beirut that looks into whether Hezbollah could feel the need to get involved in the fight between Hamas and Israel. Most think there's little chance that Hezbollah would risk doing anything that could threaten its popularity ahead of the May elections, but that could change if the military incursion in Gaza continues for several weeks. Also, if Hezbollah at some point feels that Israel was close to destroying Hamas then it might feel a certain sense of duty to get involved, partly out of concern that it might be next. "If Israel were to finish off Hamas, you can bet it would be emboldened to turn its sights on Hezbollah," an analyst said.

After 12 days of attacks, why have there been such few Israeli casualties? In a piece inside, the WP explains that when Israel launched its ground invasion on Saturday, Hamas pulled back. Militants retreated into Gaza's cities and refugee camps as Hamas "appears to be daring Israeli troops to follow." Hamas is continuing to launch rockets into Israel, but more often than before they're being fired from highly populated urban centers. Now, Israeli leaders are debating whether ground troops should be sent into urban areas to try to permanently cripple Hamas. If Israeli troops do move in, everyone expects Hamas to launch an urban warfare campaign that could include suicide attacks and car bombs.

In an interesting side-by-side comparison, the LAT fronts a look at the differences in how media in Israel and the Arab world are covering the conflict in Gaza. On television, "the war being viewed by Israelis is a sterile affair," since media, for the most part, avoid showing gory images of death and destruction inside Gaza. When casualties are mentioned, they're usually discussed in the context of how it will affect world opinion. There's an intent focus on the Israeli soldiers and their families as well as "round-the-clock coverage of the Israeli south." In the Arab world, it's completely different, and media outlets are eager to portray Palestinians "as courageous victims against a bloodthirsty aggressor." There is a seemingly endless stream of pictures of the dead and injured. "It is the cinema verite of the underdog," writes the LAT, "an erratic landscape of martyrs and heroes and boys hurling white rocks at the enemy invader."

The report by the Congressional Budget Office forecasts much pain ahead in 2009 as the economy will contract by 2.2 percent and consumption will decline by 1 percent. In addition, the jobless rate will jump to 9.2 percent by 2010, and home prices will continue on a downward spiral and decline 14 percent over two years. Obama "is being handed an absolute fiscal disaster," said Senate Budget Committee Chairman Kent Conrad, who called the CBO report "one of the worst budget forecasts I have seen in my lifetime."

In a news conference yesterday, Obama didn't provide any details about how he intends to slow the growth of Social Security and Medicare but vowed that he would do so next month when he releases his budget. If he does indeed pursue a strong effort to cut back on the programs, "he would be opening up a potentially risky battle that neither party has shown much stomach for," says the NYT. President Bush tried to overhaul the entitlement programs but failed, and Medicare actually grew under his watch.

In an interview with CNBC and the NYT, Obama said he expects the price tag of the economic stimulus plan, currently at $775 billion, to rise as it makes its way through Congress. "We've seen ranges from 800 [billion] to 1.3 trillion," Obama said, "and our attitude was that given the legislative process, if we start towards the low end of that, we'll see how it develops." Obama said he would put forward changes to financial regulation by April and vowed to step up efforts to come up with a plan to limit home foreclosures. "We've got to prevent the continuing deterioration of the housing market," he said.