"Today we hand over Ehud Goldwasser and Eldad Regev," Hezbollah official Wafiq Safa said at the Naqura border crossing between Lebanon and Israel as men placed two black coffins on the ground amid a crowd of onlookers.

"Despite the war that was waged against us and despite international pressure to reveal the fate of the two Israeli soldiers, no-one has known their fate until this moment."

The mood in Israel has been sombre as it waited to learn the fate of Goldwasser and Regev, whose capture in a deadly cross-border raid in July 2006 triggered a devastating 34-day war in Lebanon.

"Both soldiers have been identified," an army spokeswoman told AFP after forensic tests on the remains.

The International Committee of the Red Cross has also handed to Hezbollah the bodies of 12 fighters, including a Palestinian woman regarded by Arabs as a resistance heroine, under the exchange which also involves the release of a Lebanese killer who is the longest serving Arab prisoner in Israel.

Goldwasser's family broke down in cries of despair when they saw the footage of Hezbollah handing over the caskets, while neighbours gathered around the Regev home, lighting candles and quietly shedding tears.

"Eldad! Eldad! What have they done to you?" wailed Regev's aunt Hana.

Many in Israel question whether the nation is paying too high a price for the return of the soldiers who are to be buried on Thursday, saying the swap risks bolstering its arch-foes in the region.

But Lebanon is preparing a hero's welcome, with a red carpet ceremony in Naqura, where patriotic songs and excerpts of speeches by Hezbollah chief Hassan Nasrallah bellowed from loudspeakers and roads were festooned with celebratory banners and Hezbollah and Lebanese flags.

"Lebanon is shedding tears of joy," said one banner at the border, where crowds of people waited to welcome home loved ones or receive their remains. "Israel is shedding tears of pain."

Among those being exchanged is Samir Kantar, who was sentenced to five life terms for a 1979 triple murder, including a child, that shocked Israel to the core.

Four Hezbollah fighters captured in the July-August 2006 war which killed more than 1,200 people in Lebanon and 160 in Israel -- Khaled Zidan, Maher Kurani, Mohammed Sarur and Hussein Suleiman -- are also to walk free.

Israel is also to transfer to Lebanon the remains of 199 Palestinian and Hezbollah fighters exhumed over the past week.

Among the eight already handed over is Dalal al-Moghrabi, who led a bloody commando attack in 1978 that Israelis describe as the "Coastal Road Massacre."

She was killed in a battle with Israeli forces after her group blew up a bus they had hijacked on the road between Tel Aviv and Haifa, killing 36 people.

The UN-brokered swap, which was given final approval by the Israeli cabinet on Tuesday, is the eighth between Israel and the fundamentalist Shiite movement since 1991.

"Today Lebanon witnesses an unprecedented victory over Israel," proclaimed Lebanon's Ad-Diyar newspaper which backs the Hezbollah-led opposition. "Today the Lebanese prisoners return to their country with their heads held high."

Israel's Jerusalem Post newspaper has billed the festivities in Lebanon, where the released men are to be flown to Beirut to be greeted by President Michel Sleiman and Prime Minister Fuad Siniora, as "a celebration of evil."

Nasrallah, whose group is a powerful political and militia force in Lebanon, is to give a speech in Beirut's southern suburbs to hail his success in emptying Israeli jails of Lebanese prisoners.

Israeli commentators warned the swap had given a propaganda victory to Hezbollah, setting a dangerous precedent for any future exchanges and possibly encourage more kidnapping raids by militants.

"The Hezbollah leader will entrench his image as the only Arab leader who fought against Israel and defeated it," lamented Israel's Maariv newspaper.

Israel is still trying to recover Gilad Shalit, a soldier snatched in June 2006 by Gaza militants including the Islamist movement Hamas that rules the impoverished territory.

A Hamas spokesman said the sawp was a "victory for the resistance," adding: "It proves that a useful way to liberate prisoners from the jails of the occupation is to capture Zionist soldiers."

Israel's cabinet gave final approval to the swap after receiving a Hezbollah report on airman Ron Arad, who has been missing since his plane was shot down over Lebanon in October 1986 during the civil war.

Although the report said he was probably dead, Israel rejected its findings.