The body was handed over on the Lebanese-Israeli border shortly before midnight on Thursday through the auspices of the International Committee of the Red Cross.
Some 200 Hizb Allah scouts clad in black and brandishing Lebanese and Hizb Allah flags formed a guard of honour around the coffin.
Several officials of the movement in south Lebanon were also on hand.
One of the officials, Shaikh Nabil Kahuk, declared: "Recovering the remains of martyrs is a priority for Hizb Allah and confirms our commitment to the resistance."
The coffin, draped in the flag of the armed wing of the Islamic movement, was placed on a vehicle to be taken to the victim's home village near Baalbek.
The Israeli army had said earlier in a statement: "Following a request from the Lebanese government through the International Red Cross organisation to Israel, the Israeli government will return the body of a Hizb Allah terrorist to Lebanon."
Israel at the same time handed over a former Lebanese prisoner who had served a 14-year jail sentence for rape, drug possession and blackmail. He was placed under arrest by the Lebanese army.
On July 4, Hizb Allah confirmed that it had lost one of its fighters, Melhem Hassan Salhab, in clashes with the Israeli army in the disputed Shebaa Farms border district in late June.
One Israeli soldier was killed and three were wounded in the clashes, which sparked three days of retaliatory shelling and air strikes against southern Lebanon, from which Israel withdrew all troops in 2000.