Britain's arms exports scheme needs a fundamental review, Lib Dem foreign affairs spokesman Michael Moore says.
Israel denies firing the weapons at non-military targets
At the UK's third party's annual conference, he criticised Israel for using cluster bombs in Lebanon.
Mr Moore said the bombs were "turning large swathes of Lebanon into killing fields and no-go areas".
He also said he wanted to stop the transfer of weapons to Hezbollah, telling delegates: "The sponsors of that deadly trade must be confronted."
The conference voted for arms sales to Israel to be reviewed and for "firm measures" to be taken to prevent weapons going to Hezbollah.
It condemned the kidnapping of Israeli soldiers and shelling of civilians by Hezbollah fighters.
But it said Israel's response in the recent conflict had been "disproportionate".
The motion reiterated the party's stance in favour of a two-state solution "based on the principles
contained in the road map".
Kerry Hutchinson, a Lib Dem activist from the Vale of York, said he had recently visited the West Bank and Jerusalem and been appalled by a security wall separating a Palestinian primary school from its playground.
But Geoff Seeff, from Chingford and Woodford Green, called the motion "breathtakingly, touchingly naive".
He asked where Hezbollah in Lebanon got its weapons and said: "All roads lead to those models of liberal democracy and human rights, Iran and Syria."
The UN has urged Israel to say exactly where it fired cluster bombs during its recent bombardment of south Lebanon.
Humanitarian co-ordinator David Shearer says Israel's failure to provide the co-ordinates has hampered a clear-up effort that could take many months.
An average of three people are killed or wounded a day by cluster munitions since the fighting ended on 14 August.
Thousands of cluster bomblets landed in farms and villages, some 30-40% of which failed to explode at the time. Israel denies using the munitions illegally against civilian targets during the conflict.
But Mr Shearer said Israel has yet to explain why 90% of its cluster munitions were fired in the last days of the conflict, as UN members were finalising a ceasefire resolution.