Amer Cheema, 28, died in custody 10 days ago after being arrested in March on charges of attempting to kill the editor of Die Welt for reprinting cartoons of the Prophet Muhammad first published in Denmark last year.
An adviser to the chief minister of Punjab province laid a wreath on the coffin when it arrived in Lahore on Saturday morning, before it was flown in a helicopter 64km (40 miles) north to the family village in Saroki.
Islamist parties opposed to Pervez Musharraf, the Pakistani president, have sought to make political capital from the death of Cheema, depicting him as a martyr for defending Muslim honour.
Depicting images of the Prophet is against the teachings of Islam.
Up to 30,000 mourners, mainly Islamic party activists, congregated in Saroki.
The coffin's arrival was greeted with chants of "Get Amir's killers" and "Musharraf go", witnesses said.
Supporters of Jamaat-ud-Dawa, an organisation banned by the United States earlier this month for its links with terrorism, tried to stop journalists from taking photographs.
"The killing of Cheema was a barbaric act - he was killed by torture"
Gunter Mulack, Germany's ambassador to Pakistan, told a news conference in Islamabad on Friday that preliminary findings showed "no traces or indications of physical violence or other external influence" on Cheema's body.
German justice officials said last week the student had hung himself using his clothes.
But Farid Piracha, a lawmaker from the Jamaat-i-Islami party who first raised the issue in the National Assembly over a week ago, said at the funeral that Cheema had been killed.
"The killing of Cheema was a barbaric act. He was killed by torture," Piracha said.
Liaquat Baloch, another Islamist lawmaker, called for an independent investigation and said any German officials found culpable should be tried under Pakistani law.
The Islamist parties organised small but fiery protests in the capital and several cities in Punjab province on Friday.
Protesters demanded the expulsion of the German ambassador and attacks on German interests and called for the overthrow of Musharraf's government.
Some of most violent protests against the cartoons took place in Pakistan in February and March, as Islamist parties seized on the issue to undermine Musharraf, who is often criticised for co-operating with US foreign policy.