Crowds of Israelis took to the streets of Jerusalem in celebration at the news, while similar scenes were played out among Palestinians in Gaza.
The deal was announced on Tuesday by the Israeli and Palestinian leaders.
Under the terms, more than 1,000 Palestinians and Sgt Shalit, held since 2006, will be freed, beginning in days.
Sgt Shalit, aged 19 at the time, was snatched in a cross-border raid by Hamas militants who tunnelled from Gaza into Israel.
On-off negotiations for his release have taken place for several years.
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