Streets of the Yarmuk camp in the south of the capital were empty of gunmen with the rebel forces or from the pro-regime Palestinian Front for the Liberation of Palestine-General Command (PFLP-GC).
An AFP correspondent heard sporadic shooting early in the day and a main road was blocked with rocks to keep out cars, although a van full of passengers still entered through a side street.
"We returned because we have had enough of being humiliated," one of them said. "We lost our land (Palestine) but we don't want to lose our homes and live in tents like our parents."
The fighting forced about 100,000 of Yarmuk's 150,000 to flee the camp, many taking refuge in the parks and squares of Damascus, said UNRWA, the relief agency for Palestinian refugees.
Residents were called to attend weekly Muslim prayers on Friday at the camp's Abdel Qader al-Husseini mosque, which has been cleaned up after a regime air strike last Sunday that killed eight people.
Many of them already returned on Thursday evening, singing traditional Palestinian songs and sweeping away debris from battle-scarred streets inside the camp.
The exception was the bombed out headquarters of the PFLP-GC, still filled with rubble following an air raid.
Mahmud Nassar, a Palestinian activist in Yarmuk, spoke of his joy at the return of the refugees.
"It is a beautiful day. The people of Yarmuk know that the camp is the capital of the Palestinian refugees. Nobody can destroy it," he told AFP.
"But I am also concerned. I do not trust the regime. It has set up checkpoints all around the camp, and they have put soldiers and PFLP-GC militiamen to man them."
Talks began on Wednesday aimed at removing both rebel and pro-government fighters from Yarmuk as residents took flight from the fighting in the camp in their droves.
Newspapers in neighbouring Lebanon said on Friday that an agreement had been reached under the auspices of Mokhtar Lamani, the representative of UN-Arab League peace envoy Lakhdar Brahimi.
One quoted Anwar Abdel Hadi, representative of the Palestine Liberation Organisation in Damascus, as saying: "All parties... have agreed to keep the camps out of the Syrian conflict".
Abdel Hadi said the Syrian government had given assurances that it had "no intention of entering the camp or bombing it, but demanded the departure of all armed men".
The UN's World Food Programme, meanwhile, said it was to start providing food to 125,000 "vulnerable Palestinians and displaced Syrians" caught up in and around Yarmuk.
"These people have already suffered tremendously in their journey in search of safety for their families and young children, moving from one place to the other hungry, terrified and cold," said WFP chief Ertharin Cousin.
"We remain committed to supporting the most vulnerable in Syria. No one should go hungry."
Syria is home to 490,000 Palestinians, most of them having fled to the country during the 1948 Arab-Israeli war. Many thought they would return home quickly and at first lived in tents.
When hopes of their return faded, the tents were replaced with brick houses and buildings, and some camps have since become neighbourhoods of Damascus and other cities.