Even as people in the troubled region described the cessation of hostilities as an "Eid gift", a rebel leader based in Pakistan said that his group would continue the fight.
In Srinagar, though, the mood was upbeat with the border truce giving a much-needed respite to harried locals.
Children were seen decked in their Eid finery as Indian troops put up signs wishing everybody a happy holiday.
"May this peace last forever," Kashmir's chief cleric Umar Farooq said in a sermon to thousands.
Farooq had said during prayers on Friday that Kashmir's main separatist alliance was ready for talks with New Delhi to resolve the long-standing dispute.
Lashkar vows jihad
The euphoria over the ceasefire, which came into effect on Wednesday, was tempered by calls for jihad by Hafiz Saeed, founder of the outlawed Lashkar-e-Taiba rebel group.
Addressing some 150,000 worshippers in the eastern Pakistani city of Lahore, Saeed said the group would continue its attacks in Kashmir.
"We will continue jihad without any fear or pressure and will not stop it on the asking of anybody," said Saeed, whose renamed group Jamaat-ud Dawa has been placed on a government watchlist under a new "anti-terror" drive.
Truce will bring back the tourists
"Jihad is inevitable for the glory of Islam. The jihad process is continuing in Kashmir, Bosnia, Palestine and Iraq. Jihad has made Jews and Christians worried. They call jihad terrorism," Saeed said.
In New Delhi, Indian Prime Minister Atal Behari Vajpayee said Eid al-Fitr was a time to focus on tolerance and co-existence.
"Let Eid this year inspire people from all walks of life to rededicate themsleves to the task of strengthening communal harmony and nation building with renewed vigour," Vajpayee said in a holiday message.
In the western state of Gujarat, where some 2000 people died in communal riots last year, worshippers said they hoped for unity on Islam's holiest day.
"The first person to greet me for Eid was a Hindu. We held a big prayer meeting this morning in a sensitive area but the atmosphere was very congenial," said Mohsin Kadri, a lawyer for victims of the riots.
"During these celebrations Gujaratis tend to forget their differences. Unfortunately, people tend to get brainwashed very easily by vested interest groups and give in to the slightest provocation," Kadri said.