According to Israeli military sources, the Syrian army has taken control of an UN-monitored crossing in the Golan Heights that had been overrun by rebel forces.
Tanks and armored vehicles were used in the fighting at Quneitra, near Israeli-held territory.
Austria has said it will withdraw its peacekeepers from the Golan Heights because of the fighting.
It comes a day after Syrian troops backed by Lebanese Hezbollah militants retook the key town of Qusair.
The involvement of Hezbollah and the upsurge of fighting near the ceasefire line with Israel in the Golan have both raised fears that the conflict could spread across Syria’s borders.
Rebels seized the crossing near the town of Quneitra earlier on Thursday, with explosions and heavy shelling rocking the area.
But an Israeli military source said Syrian government forces retook the symbolically significant position hours later, and that it was now relatively quiet in the area.
Two UN peacekeepers were wounded as fighting raged around the crossing and Quneitra.
Austria said it would withdraw its soldiers because the threat had “reached an unacceptable level”.
Austrian troops make up more than a third of the more than 900-strong UN force monitoring the demilitarized zone and Quneitra – the only open crossing between Syria and the Israeli-controlled Golan Heights.
Israel expressed regret at Austria’s decision, and said it hoped it would not lead to “further escalation” in the region.
The UN said the withdrawal of Austrian troops would affect the mission’s operational capacity and it would look for replacements.
Croatia, Canada and Japan had already withdrawn their contingents in the Golan because of the conflict in Syria.
Syria’s deployment of tanks in the demilitarized zone violates ceasefire agreements in place since the Arab-Israeli war of 1973.
Israel captured part of the plateau in 1967 and later annexed it in a move that has never been internationally recognized.
Israeli officials have voiced fears the civil war in Syria could spill over their borders. They are worried the Golan Heights could be used to launch attacks against Israel – either by Islamist extremists fighting for the rebels, or by Hezbollah militants fighting on the government side.
Hezbollah’s growing role in the conflict was highlighted by its involvement in the battle for Qusair, which government forces recaptured on Wednesday after a bitter siege.
Hezbollah is a political and military organization in Lebanon made up mainly of Shia Muslims.
It emerged with backing from Iran in the early 1980s when it fought Israeli forces in southern Lebanon and has always been a close ally of Syrian President Bashar al-Assad.
Its involvement in Syria has heightened sectarian tensions across the region, and the US has called for it to withdraw.
Late on Wednesday several rockets landed in the Hezbollah stronghold of Baalbek inside Lebanon – after rebel threats to strike at Hezbollah on its home turf.
Qusair lies only 6 miles from the Lebanese border and is close to important supply routes for both the government and rebels.
As the battle for Qusair raged, fighting was continuing in most other parts of Syria, especially around the capital Damascus, where regime forces are trying to push the rebels back from the suburbs.
More than 80,000 people have been killed in Syria and more than 1.5 million have fled the country since an uprising against President Bashar al-Assad began in 2011, according to UN estimates.
International efforts to resolve Syria’s conflict continue, but the US and Russia have failed to set a date for proposed peace talks.
Meanwhile France has said that growing proof of chemical weapons use in Syria “obliges the international community to act”.
However, President Francois Hollande cautioned: “We can only act within the framework of international law.”