The Taliban, who had kidnapped five health workers in March, demanded this week that Dadullah's remains be handed over to his family or else the hostages would be killed.
Meanwhile, a local police official confirmed Dadullah's remains had been handed over to his relatives late on Wednesday night in Kandahar.
Dadullah - nicknamed Afghanistan's Abu Musab al-Zarqawi after the slain al-Qaeda leader in Iraq - was the main architect of suicide bombings, kidnappings of foreigners and Afghans, beheadings and the rise of violence in the south.
An al-Qaeda leader threatened US-led forces and their Afghan allies with a deadly summer of attacks in revenge for Dadullah's killing.
Abu Yahya al-Libi issued the threat in a video statement posted on the internet on Wednesday.