Tel Aviv, Israel - Applause and cheers filled a Tel Aviv square on Saturday as Gaza militants released four Israeli hostages, followed by celebrations in the occupied West Bank when Israel freed 200 Palestinian prisoners in exchange.

While Israel and Hamas completed their second hostage-prisoner swap under a ceasefire deal aimed at paving the way for a permanent end to their war, a last-minute dispute blocked the expected return of hundreds of thousands of displaced Palestinians to the Gaza Strip's devastated north.

The four hostages released, all women soldiers, reached a hospital on the outskirts of Israel's commercial hub, Tel Aviv, after more than 15 months of captivity in Gaza.

Israel's prison service confirmed that 200 Palestinian prisoners were freed in exchange, with some of them subsequently deported.

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The Israeli captives, Karina Ariev, Daniella Gilboa, and Naama Levy, all 20 years old, and Liri Albag (19), waved, smiled, and gave thumbs up as they were paraded on a stage in Gaza City, flanked by masked and armed militants.

After their handover to the International Committee of the Red Cross, the military said the women were brought to Israel and "reunited with their parents".

In Ramallah, seat of the Palestinian Authority in the West Bank, crowds of Palestinians erupted in joy as dozens of freed prisoners arrived on buses from jail.

One of them, Azzam al-Shallalta, dropped to his knees and wept at his mother's feet after the teary-eyed crowd carried him on their shoulders, an AFP journalist reported.

"My situation was heartbreaking, truly heartbreaking. We pray to God to free all our brothers we've left behind", said Shallalta, still wearing his gray prison tracksuit.

According to a list provided by the Palestinian Prisoners Club advocacy group, among those released was Mohammed al-Tous (69), who has spent the longest continuous period in Israeli detention. Data from the Israeli authorities suggested he was to be deported.

The freed Israeli hostages were taken by military helicopter to the Rabin Medical Center, whose deputy director Lena Feldman Koren said the four were in a "stable" condition even though "the prolonged captivity in harsh conditions is evident".

Footage released by the military showed the families overcome with joy at being back together.

Albag and her parents were seen screaming with happiness and laughing while her father lifted her off the ground in a bear hug.

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Prime Minister Benjamin Netanyahu spoke with Albag's parents after her release, telling them that "this is a very happy moment that we have been waiting for a long time", according to a statement from his office.

The US, which had helped secure the truce deal, said it "will continue with its great partner Israel to push for the release of all remaining hostages".

Bassem Naim, of the Hamas political bureau, had told AFP on Friday that Palestinians displaced from northern Gaza by the war should have been able to begin returning home after Saturday's releases.

But Israel announced on Saturday that it would block such returns until civilian woman hostage Arbel Yehud is released.

Prime Minister Benjamin Netanyahu's office said she "was supposed to be released today" but a Hamas source told AFP Yehud will be "released as part of the third swap set for next Saturday".

Palestinian police prevented hundreds of displaced people from reaching the Israeli-controlled passage to the north, where Israeli tanks and armored vehicles were blocking the road.

Rafiqa Subh, waiting to return to Beit Lahia, said: "We want to go back, even though our houses are destroyed. We miss our homes so much."

The hostage-prisoner exchange is part of a fragile ceasefire agreement between Israel and Hamas that took effect last Sunday.

The truce has brought a surge of food, fuel, medical, and other aid into rubble-strewn Gaza, but Israel's UN ambassador confirmed on Friday that the United Nations Agency for Palestinian Refugees, Gaza's main aid agency, must end all operations in Israel by Thursday.

Hundreds of truckloads of aid have entered Gaza daily since the ceasefire began, but the UN says "the humanitarian situation remains dire".

The ceasefire agreement should be implemented in three phases, but the last two stages have not yet been finalized.

During the first six-week phase, 33 hostages should be freed in staggered releases in exchange for around 1,900 Palestinians held in Israeli jails.

Three women hostages returned home on the first day of the truce in exchange for 90 Palestinians.

Of the Palestinians to be freed in the first phase, more than 230 are serving life sentences for deadly attacks on Israelis and will be permanently expelled, according to a list made public by Israeli authorities.

State-linked Egyptian media said 70 freed Palestinian prisoners "deported" by Israel had arrived in Egypt by bus. They were to travel on into exile in third countries.

The deal's second phase is to see negotiations for a more permanent end to the war, but analysts have warned it risks collapsing because of the deal's multi-phase nature and deep distrust between Israel and Hamas.

During their October 7, 2023 attack, Hamas militants took 251 hostages, 87 of whom remain in Gaza, including 34 the Israeli military says are dead. The attack resulted in the deaths of 1,210 people, mostly civilians, according to an AFP tally based on official Israeli figures.

Israel's assault on Gaza, deemed genocidal by numerous experts and human rights groups, has killed at least 47,000 people – the majority civilians – though the true death toll is believed to be scores higher.