Hezbollah handed over the bodies of two Israeli soldiers to the Red Cross on Wednesday to be exchanged for Lebanese prisoners held by Israel.

The deal is viewed as a triumph by the Lebanese guerrilla group and as a painful necessity by many Israelis, two years after the soldiers' capture sparked a 34-day war with Hezbollah that killed about 1,200 people in Lebanon and 159 Israelis.

Hezbollah's al-Manar TV showed two black coffins being taken from a vehicle at the Israel-Lebanon border after Hezbollah security official Wafik Safa disclosed for the first time that army reservists Ehud Goldwasser and Eldad Regev were dead.

The International Committee of the Red Cross (ICRC) took charge of the coffins. Safa later said DNA tests conducted by the ICRC had confirmed the identity of the soldiers. There was no immediate confirmation from the Red Cross or Israel.

"We are now handing over the two imprisoned Israeli soldiers, who were captured by the Islamic resistance on July 12, 2006, to the ICRC," Safa said at the border. "The Israeli side will now hand over the great Arab mujahid (holy warrior) ... Samir Qantar and his companions to the ICRC."

In a deal mediated by a U.N.-appointed German intelligence officer, Israel was to free Qantar and four other prisoners.

Qantar had been serving a life prison term for the deaths of four Israelis, including a four-year-old girl and her father, in a 1979 Palestinian guerrilla attack on an Israeli town.

Neighbors outside the Regev home wept at the news the two soldiers were dead. Fighting back tears, Shlomo Laniado, who served in their reserve unit, said on Israel's Channel Two television: "It increases the motivation to protect this country and it shows us who we are dealing with."

Israel will also hand over the bodies of 200 Arabs killed trying to infiltrate northern Israel. Hezbollah will return the remains of Israeli soldiers killed in south Lebanon.

The deal also calls for Israel to release scores of Palestinian prisoners at a later date as a gesture to U.N. Secretary-General Ban Ki-moon.

HEZBOLLAH READY TO CELEBRATE

Hezbollah has dubbed the exchange "Operation Radwan," in honor of "Hajj Radwan," or Imad Moughniyah, the group's military commander who was assassinated in Syria in February.

Yellow Hezbollah flags and banners fluttered across south Lebanon and along the coastal highway from the border village of Naqoura to the capital, Beirut. "Liberation of the captives: a new dawn for Lebanon and Palestine," one banner read.

Israel denounced the planned festivities.

"Samir Qantar is a brutal murderer of children and anybody celebrating him as a hero is trampling on basic human decency," Israeli Prime Minister Ehud Olmert's spokesman Mark Regev said.

Israeli cabinet minister Ami Ayalon said television pictures of the handover had saddened him. "First and foremost, what I want is to see an Israeli flag on these coffins as soon as possible. These pictures show no respect and I say this in sorrow. But, okay, this is the reality."

For some Lebanese, the exchange demonstrated the futility of the devastating conflict with Israel two summers ago.

"There shouldn't have been a war in 2006. A lot of lives were lost," said Rami Nasereddine, an 18-year-old student in downtown Beirut. "It's good that the prisoner exchange is taking place. Israel should have done that two years ago."

Israeli television showed the five Lebanese, their hands and feet manacled and wearing grey tracksuits, being processed by prison service officials. All looked solemn. Qantar gave his name and answered questions in Hebrew.

Israeli President Shimon Peres set the prisoner swap in motion on Tuesday by pardoning Qantar, reviled in Israel for his role in the 1979 attack. Qantar, aged 17 at the time, has said the father was shot by Israeli soldiers who also wounded him, and that he doesn't remember what happened to the girl.

Peres said he felt "bitter and unbearable pain" at the decision and that it "in no way constitutes forgiveness," but that Israel was obliged to get its soldiers back.

Olmert had described Qantar as the last bargaining chip for word on Israeli airman Ron Arad, who disappeared after bailing out while on a bombing run over Lebanon in 1986.

Israel said a report supplied by Hezbollah on Arad as part of the prisoner deal had failed to shed new light on his fate.

Hezbollah has made Qantar's freedom a central demand. Many in Lebanon believe Israel's refusal to free Qantar earlier prompted Hezbollah's cross-border raid that led to the 2006 war.

The other Lebanese prisoners being released were identified as Maher Qorani, Mohammad Srour, Hussein Suleiman and Khodr Zeidan. They were to receive a heroes' welcome of fireworks and rallies in Lebanon, which declared a public holiday.

(Additional reporting by Tom Perry and Nadim Ladki in Beirut and Jeffrey Heller and Dan Williams in Jerusalem; Writing by Alistair Lyon; Editing by Giles Elgood)