Israel is also handing over the remains of some 200 Lebanese and Palestinian fighters killed in northern Israel. The exchange is being mediated by the International Committee of the Red Cross.
'Moral obligation' Lebanon has declared a national holiday to mark the swap, after which Israel will hold no more Hezbollah militants.
Under the deal - the fruit of two years of delicate German mediation - Hezbollah is also to return the body parts of Israeli soldiers killed in south Lebanon in 2006.
The agreement has caused controversy in Israel, with some ministers opposed to the possibility of exchanging live Hezbollah prisoners for dead bodies.
But Israel says it has a moral obligation to bring its soldiers home. Israel's cabinet gave its final approval for the prisoner exchange on Tuesday. The Lebanese prisoners being freed include Samir Qantar, in jail since 1979 for a deadly guerrilla raid in which he killed three Israelis, including a child.
The BBC's Crispin Thorold in Beirut says the exchange will be a moment of jubilation for Hezbollah, who are claiming the deal as a victory.
Ehud Goldwasser's father, Shlomo Goldwasser, said he was mystified by the Lebanese celebrations.
"I cannot understand what the Lebanese are so glad about and happy about," he said.
"They sacrificed over 700 of their best warriors and all their economy, and what they get for what they did is a murderer, a bloody murderer of a three-and-a-half-year-old girl and her father - and for this they are making all this glory, for this they sacrificed so much. So I feel only pity for them."
Qantar's imprisonment was arguably a catalyst for the 2006 war between Hezbollah and Israel, our correspondent says, as Lebanese militants captured the two Israeli soldiers to demand his release.
Meaning Hezbollah lied since day 1 about them. And the Media also lied they were implying they were alive even up until this last story. Even the headlines on the BBC channel state prisoner sway. Well live prisoners were exchanged for dead ones. But not israeli
Tags: Israel, Lebanon, Hezbollah, Hizbullah, prisoner swap, Dead soldiers, Iranian expansion, Invasion of israel, 2006, lebanon war, Hezbollah invasion of israel.
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