Azahari bin Husin's body was brought to his home village in southern Malacca state, where 200 people gathered in drizzling rain on Thursday night to witness his burial near his mother's grave in a small cemetery.
His corpse was earlier flown to Malaysia from the Indonesian capital, Jakarta.
Azahari, a Malaysian citizen known as Demolition Man because of his explosives expertise, has been accused of being a key leader of the al-Qaida-linked terror group Jemaah Islamiyah, which has allegedly orchestrated four deadly attacks in Indonesia since 2002.
He fled Malaysia in late 2001, leaving behind his wife and two children, when police uncovered his suspected role in terrorist activities.
Azahari's younger brother, Yusuf Husin, led a prayer ceremony in a mosque at his funeral, where mourners in the rubber plantation village - including Azahari's 78-year-old father - beseeched God to forgive Azahari for any wrongdoing.
"We are sorry if during his lifetime he has brought any misery to you unintentionally. Please bless his remains," Yusuf said.
Villagers voiced scepticism over the accusations against him.
Azahari was shot dead by police
"Azahari will always have friends here. We shouldn't be asked to believe what is written about him in the newspapers," a man who identified himself only as Yusri said.
As Azahari's coffin was lowered into the ground, several people shouted, "Allahu Akbar", or "God is great!" A Muslim cleric recited verses from the Quran while members of Azahari's family sobbed and sprinkled rose-scented water over his grave.
Azahari's wife, who is suffering from throat cancer, and children were not present because she was too ill to travel from their home in Kuala Lumpur, relatives said.
A former university lecturer in his 40s, Azahari was killed by police in an 9 October raid on his hideout in Batu, a resort town east of Jakarta.
"Azahari will always have friends here. We shouldn't be asked to believe what is written about him in the newspapers"
He allegedly played a key role in the 2002 Bali bombings that killed 202 people, and three other terror strikes that together killed 40, police say.
He is believed to have received bomb-making training in the southern Philippines in 1999, and advanced training in Afghanistan in 2000.
Separately Thursday, Malaysian Deputy Prime Minister Najib Razak said authorities will take action against anyone who channels money to terror groups in Indonesia, following an Indonesian media report that Azahari received funds from Malaysian sympathisers.
Najib stressed that his government opposes terrorism, but added "we do not know if there are individuals who are funding" Jemaah Islamiyah operatives in Indonesia.