Their plane flew low over the capital Reykjavik before landing at Keflavik airport where the local fire services gave them a fire hose guard of honour with shooting water creating a rainbow.
Lagerbäck and his players were then paraded through the streets of the capital on a double decker bus in the direction of Arnarholl Park, to celebrate with their fans and sing the famous “huh” chant – punctuated by hand clapping.
“Fairy tales still exist! It's rare – if indeed this has ever happened – to unite us Icelanders as you did on the football pitch,” Prime Minister Sigurdur Ingi Johannsson told the team in downtown Reykjavik, to the resounding cheers of tens of thousands of supporters.
“You are a national treasure,” he added as fans waved flags and team jerseys.
To the delight of the crowd, the heroes of the day sang the “huh” watched emotionally by coach Lagerbäck, who hailed a “team performance” and confided he felt at home whenever he was in Iceland.
The Swede's time with Iceland in France was his seventh major finals, having led his native Sweden to five and Nigeria at the 2010 World Cup.
He will now hand over the reins to co-coach and part-time dentist Hemir Hallgrimsson, after which he has previously hinted (and then appeared to backtrack) he will retire.
“I don't know what happens now, we have to wait and see,” Swedish newspaper Aftonbladet wrote that he told the crowd on Monday. “But I would love to return. I hope I will get to see many national team matches here in Reyjkavik.”
— Andrés Islas (@CapsNarrador) July 4, 2016
Striker Kolbeinn Sigthorsson, who scored a consolation goal in the crushing 5-2 defeat to the hosts at the Stade de France on Sunday said he was happy to be home.
“It was a dream come true to get that support,” he said of the estimated 30,000 fans – some ten percent of the population – who followed the nation in France.
“We experienced something simply wonderful, it was a dream come true and we are proud to have brought such cheer to our country,” he said, adding that the friendly behaviour of the fans had done the country proud.
Many present had also followed the team to France. August Ingi Kristjansson, a 23-year-old who was present in Stade de France on Sunday, said: “They react with pride even after defeat. They did not give up, they did not stop, they return as heroes.”
“I'm just so proud,” added Sverrir Gardarsson. “What will happen next? We will rule the world!”
Iceland drew with Hungary and Portugal, then beat Austria to book a last-16 place, where they defeated England 2-1 to set up the quarter-final with France.