Israel freed 26 Palestinian prisoners on Tuesday, days before U.S. Secretary of State John Kerry was due back in the Middle East to press the two sides to reach a framework peace deal.
Israel agreed to release a total of 104 Palestinian prisoners as part of a U.S.-brokered package that in July revived peace talks after a three-year break. Tuesday's release was the third of four groups to go free.
On Friday, an Israeli official said plans would be announced after the release to build 1,400 homes for Israeli settlers in the occupied West Bank, territory Palestinians seek for a state along with the Gaza Strip and East Jerusalem.
Jailed before or just after the first Israeli-Palestinian interim peace accord was signed 20 years ago, the inmates boarded buses for home outside Ofer prison in the West Bank as Israelis protested in East Jerusalem against the amnesty.
Palestinian President Mahmoud Abbas greeted the men at his headquarters in Ramallah. "We promise you this will not be the last time and there will be more groups of heroes coming to us frequently in the near future, God willing," Abbas said.
Three of the prisoners were sent to the Gaza Strip, which is under the rule of Abbas' rival, the Islamist group Hamas. It rejects peace talks with Israel.
"The heroes are back," hundreds chanted as they carried the men through the enclave's streets.
Israeli Prime Minister Benjamin Netanyahu criticised Palestinians celebrations, saying: "Murderers are not heroes. That is not the way to make peace."
Jamal Abu Musin, convicted in Israel on murder charges and freed on Tuesday, said: "The message of prisoners is that people will not forget them, they hope to be released and they live with hope."
Hours before the release dozens of Israelis marched toward the East Jerusalem home of one of the prisoners, carrying black umbrellas and holding pictures of those killed or wounded in attacks.
"Releasing terrorists in the name of peace is like pouring fuel on a fire in order to put the fire out. It's going to explode in your face," said Yonah, one of the demonstrators.
In the West Bank village of Dahiyat al-Zira, suspected Jewish vandals torched three Palestinian cars and wrote "regards to John Kerry - to be continued" on a house. Israeli police said they was investigating the incident.
U.S. State Department spokeswoman Marie Harf said the prisoner release was a "positive step forward". Officials said Kerry was due in the region on Thursday to meet Abbas and Netanyahu.
The United States is seeking to broker an agreement on a "two-state solution" in which Israel would exist peacefully alongside a new Palestinian state.
Kerry, who has set a nine-month target date for a deal, wants the sides to agree a framework deal that could launch another year of talks leading to a peace treaty. But there has been little sign of progress.
Palestinians fear Israeli settlements, built on occupied land and deemed illegal by the United Nations, will deny them a viable state and have warned further construction could jeopardise the talks. Israel says it is building settler homes in areas it intends to keep in any final peace agreement.