Acts of War
If confirmed, the reports could lead to an Israeli air strike on the embassy, possibly leading to a widening of the conflict, said officials who spoke on the condition of anonymity. Foreign embassies are sovereign territory and an attack on an embassy could be considered an act of war.Yes, of course deliberately bombing an embassy would be an act of war. But so would be sheltering Nasrallah, or at least it would be if Israel demanded his surrender and his host government refused. If the Iranians have decided to commit such an overtly hostile act against Israel, it's because they're guessing that Israel won't escalate matters by retaliating; similarly, if the Israelis decide to bomb the embassy, it will be because they'll be guessing that Iran won't take it further, into open war.
UPDATE: This article (H/T once again Instapundit) makes an important point:
There are circumstances, long recognized in customary law of jus ad bellum, in which states will make incursions or aggressions of a limited nature against another party. [...] The law of belligerent reprisal allows a party that has been the subject of an armed provocation to retaliate, in order to make clear to the other party that it will defend its sovereignty, but to do so in a way that sends a legal signal that it will not escalate the conflict if the other party does not. It is a form of legal self-help - responding with force, but force that is proportionate to the immediate provocation and intended to close the circle of violence and cut it off with a single tit-for-tat, rather than see it spiral upwards into full conflict. [...]It is intended to stop short of full belligerency, in which the war aims shift, and proportionality is no longer measured by the immediate provocation, but by a state's assessment of the underlying threat.It seems to me that and Israeli strike on the Iranian embassy, following a clear demand for Nasrallah's surrender and a clear Iranian refusal, would be just such an act of proportionate reprisal – an act of war indeed, but one intended to do no more than cure the immediate problem and so keep the conflict from turning into a full-scale war.