Crowds of people, many holding red roses and pictures of the poet, recited his poems as the coffin was taken through the streets.
Many in the crowd held pictures of Ahmad Shamlu
Mr Shamlu died on Monday at the age of 75, after a long illness.
He was a lifelong campaigner for greater freedom of expression, was several times jailed by the former regime of the Shah of Iran, faced a firing squad but was pardoned at the last minute and went into exile for a while.
"I have never been afraid of death," chanted some of the mourners, a phrase from one of Ahmad Shamlu's famous poems.
Dissident poet
The crowd gathered early on Thursday morning, blocking the streets as the coffin was taken from Iran-Mehr hospital in northern Tehran towards the central Mirdamad Avenue.
The coffin was taken to the poet's hometown, Karaj, 40km (25 miles) west of the city.
Shamlu's life
1925: Born in Tehran, father an army officer
1943: Arrested and jailed for political activities
1945: Faces firing squad before last-minute pardon
1953: Collection of poems The Iron and Emotion is burnt by police
1969: His magazine Khusheh closed by Savak, Shah's secret service
1977: Leaves Iran in protest at repression
1979: Returns home after Islamic revolution
Mourners travelled to the graveyard in 40 buses, where Ahmad Shamlu is to be buried near other famous Iranian artists and writers, until a mausoleum has been built.
The funeral was attended by dissident writers and poets, including the poet Simin Behbahani and the writer Mahmoud Dolatabadi.
One mourner, law student Gachtasp Farahmand, said: "If you see many young people, it's because Shamlu's works represent our aspirations: love, challenges, and courage."
Ahmad Shamlu was regarded by critics as a poet of world standing. His work was translated into English and other languages.
He was active in organising the Iranian writers to fight censorship imposed by both the former regime of the Shah and the Islamic government.
Harassed by the authorities, he left Iran in 1977 to publish a popular anti-Shah newspaper in Britain.
But when he returned home after the Shah was overthrown he found the new Islamic regime as hostile as the previous one.