Gyalzen Sherpa, 85, one of three surviving Sherpa from the first Everest expedition, climbed into a horse-drawn carriage with Hillary, 83, and his wife, June, and placed yellow scarves around their necks.
They then set off at the head of a parade of carriages bearing other famous Everest mountaineers as a Gurkha army band played on bagpipes and drums and local children waved flags.
"It's a historic moment for Nepal. And I feel it's being done in the right way," said Jamlin Norgay, son of the late Tenzing Norgay, who with Hillary was the first to reach the 29,035-foot summit on May 29, 1953. "It's an honor bestowed on my father and Hillary."
Norgay himself reached the summit in 1996. He rode in the second carriage, with Junko Tabei from Japan, the first woman to climb Everest.
"More women have got to climb Everest now," Tabei said, adding that only 5 percent of the 1,200 people who have reached the summit of Everest have been women. "Many young people should climb."
Close behind them on foot were hundreds of other climbers and fans.
The procession paused in Katmandu's central Durbar Square, where the Nepal Mountaineering Association and city officials handed scarves, books, wooden carvings and photographs to several famous climbers, including Hillary, Tabei, Norgay and Italian Reinhold Messner, the first person to climb Everest without bottled oxygen.
"Today has been a fantastic celebration of the warmth of the people of Nepal," Hillary told a cheering crowd that filled the square and the steps of several temples that surround the World Heritage Site.
The climbers are also scheduled to be honored by Nepal's King Gyanendra and Prime Minister Lokendra Bahadur Chand on Thursday's 50th anniversary.
Two-thirds of those who have climbed Everest in the last 50 years are believed to be still alive, but only about 100 have come to Nepal's weeklong celebration.
To mark the anniversary, a record number of people are climbing Everest this month. The Nepalese tourism ministry says more than 110 climbers and their Sherpa mountaineering guides have scaled the peak in the past few days and more will try before Thursday.
"In the 1950s, it was very hard to get to the summit. These days everybody climbs. I thought the mountain may have become lower than it was before," joked Gyalzen Sherpa, wearing a cowboy hat and a medal issued by Queen Elizabeth II for those in the first successful expedition.
He said he had received the medal from Tenzing Norgay.
New Everest records are still being set this season.
A 70-year-old Japanese ski instructor, Yuichiro Miura, became the oldest climber to reach the summit, while a 15-year-old Sherpa girl became the youngest.
Lakpa Gyelu, 35, raced from the 17,380-foot base camp to the summit in a record 10 hours and 56 minutes. While another Sherpa, Appa, 42, reached the summit for the 13th time.
By Laurinda Keys