Alec MacLachlan, 30, of Llanelli, south Wales, was one of five men kidnapped in May 2007.
Up to 150 family members and friends attended a private service at All Saints Church in his home town of Llanelli.
Police diverted traffic away from the street where the church stands to allow the private service to take place in a dignified hush.
Outside, a handful of people stood in the almost empty street, paying their last respects from the pavement opposite the church.
Stanley Williams, 71, said he had known Mr MacLachlan's mother for many years and wanted to pay his respects privately.
"His mother, Helen, trained as a nurse and my sister trained with her and, obviously, they stuck together.
"They are a nice family but, of course, something like this changes you. It is very sad for everyone concerned."
Computer expert Peter Moore and his four bodyguards, Mr MacLachlan among them, were seized at the finance ministry in Baghdad by 40 armed men wearing police uniforms.
Only Mr Moore, 36, from Lincoln, is still believed to be alive, and negotiations for his release are ongoing.
The body of what proved to be Mr MacLachlan was flown back to Britain at the end of August.
It followed the handover of the bodies of Jason Swindlehurst, 38, from Skelmersdale, Lancashire, and Jason Creswell, 39, originally from Glasgow, to the British Embassy in Baghdad in June.
The family of the fourth security guard, Alan McMenemy, from Glasgow, was told by the Foreign and Commonwealth Office in July he was "very likely" to have died.
The kidnappers, calling themselves the Islamic Shiite Resistance in Iraq, had previously issued several videos featuring the captives and making demands.
An inquest in Salisbury earlier this week confirmed that Mr MacLachlan had died from a gunshot to the head.
It heard that his body had been positively identified through the use of dental records, DNA samples and tattoos.
The inquest was then adjourned and Mr MacLachlan's body was released to his family for burial.
After the service today the body of Mr MacLachlan was due to be taken to another local church for burial.
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