|Israel's 34 day war with Hezbollah began after two Israeli soldiers were captured in a raid [File: EPA]|
An army report released last December said that the two soldiers were wounded, one seriously and the other only moderately, during their capture.
The identity of the Israeli body, that has arrived at the border in an ambulance accompanied by Hezbollah vehicles, was unclear.
"Up to now no one even knew that Hezbollah were holding the body of an Israeli. We don't even know if it is a civilian or soldier," Al Jazeera's Rula Amin said from the Naqoura crossing.
She said that the deal was organised by a German mediator and only finalised last weekend.
A series of reports on the Middle East one year after the war in Lebanon
Asharq Al-Awsat, an UK-based Arabic newspaper, reported on Sunday that the two soldiers captured by Hezbollah had been handed to Iran and could be freed as part of a German-brokered exchange.
It quoted a source identified as a high-ranking official in the office of Ayatollah Ali Khamenei, Iran's supreme leader, as saying they had been transferred by the country's elite Revolutionary Guards.
Last week, Germany decided last week to free an Iranian agent jailed for life for the murder of four Kurdish dissidents in 1992 and the newspaper suggested that this could have been part of the deal.
A senior Israeli government official dismissed the Asharq Al-Awsat report as "nonsense" and said it was an "attempt to dissiminate disinformation on this extremely sensitive issue."
Germany also dismissed suggestions that the agent was released as part of a deal with Tehran.
Israel has also been seeking the return of the bodies of five soldiers who were killed during Israel's 1982 war in Lebanon.
In 2004, Israel freed nearly 450 prisoners, most of them Palestinians and Arabs, in exchange for Elhanan Tannenbaum, an Israeli businessman and the bodies of three soldiers.
As part of the swap, Israel agreed to free Samir Kantar, a Lebanese prisoner, at a later date in return for information on the fate of Ron Arad, an Israeli air force navigator who has been missing since October 1986 when his plane was shot down over southern Lebanon.
Kantar received jail sentences totalling 542 years from an Israeli court in 1980 for killing a scientist and his four-year-old daughter as well as an Israeli policeman.
Source: Al Jazeera and agencies